When pensions are discussed during divorce, one figure often receives a great deal of attention: the Cash Equivalent Transfer Value, commonly known as the CETV.
It provides a useful starting point when pension assets are being considered as part of a financial settlement; however, a CETV doesn’t necessarily tell you everything you need to know about what a pension may provide in retirement.
For example, if one pension has a CETV of £400,000 and another has a CETV of £200,000, it might seem reasonable to assume that the first is simply worth twice as much.
The position can be more complicated, particularly where different types of pension are involved.
Understanding what sits behind the CETV is therefore an important part of pension planning for divorce.
What is a pension CETV?
A Cash Equivalent Transfer Value places a current monetary value on pension benefits and broadly represents the value available if those benefits were transferred elsewhere.
During divorce, this gives the pension a figure that can be considered alongside other assets, such as property, savings, investments, and business interests, within the settlement.
The CETV is useful, but it doesn’t always show the level of retirement income or the guarantees attached to a pension. Those features can become particularly important when comparing different pension arrangements.
Why aren’t pension values and pension benefits the same thing?
Two pensions can have the same CETV while providing very different benefits.
For example, one might be a defined benefit pension providing a guaranteed income for life, potentially with increases linked to inflation. Another could be a defined contribution pension where the eventual income available will depend on factors including investment performance and how the pension is accessed.
Both might have a CETV of £300,000, but that doesn’t mean they’ll necessarily produce the same retirement outcome.
This is why how pensions are split in divorce needs to be considered in the context of the pension benefits themselves, rather than using the CETV as the only measure.
Why can defined benefit pensions be more difficult to value?
Defined benefit pensions, which are sometimes called final salary pensions, can require particularly careful consideration.
Rather than simply providing an investment pot, these schemes usually promise a level of income based on the scheme rules. That income may continue for life and can include inflation-linked increases or other benefits.
The CETV attached to a defined benefit pension is calculated by the scheme and can be affected by the assumptions used at the time. As a result, the figure shown may not fully communicate the value of the retirement income attached to the pension.
Where pension arrangements are more complex, an actuarial pension report may provide additional information to help with the settlement discussions.
Does a £500,000 pension equal £500,000 of property?
Consider a settlement where one option involves £500,000 of pension benefits and another provides an additional £500,000 of property equity.
The headline values are the same, but the assets serve different purposes.
Property can meet an immediate housing need, although owning it will usually involve ongoing costs. Pension benefits are intended to provide income later in life and may come with guarantees that aren’t reflected by comparing the figures alone.
That doesn’t mean one option is necessarily preferable. The important point is that equal asset values can produce very different financial outcomes.
It’s also one reason why assumptions about a straightforward 50/50 split in a divorce settlement can be unhelpful when different types of assets are involved.
A case study: looking beyond the CETV
Karen* and Michael* were both 60 and approaching retirement.
One of the largest assets being considered as part of their settlement was Michael’s defined benefit pension, which had a CETV of approximately £450,000.
Karen initially focused on that figure when considering the settlement options; on paper, it appeared possible to offset part of the pension value against other assets, including additional equity in the property.
When the pension benefits were examined in more detail, however, the expected retirement income and the guarantees attached to the scheme also needed to be considered.
This gave Karen a better basis for assessing how the different settlement options could affect her retirement, rather than relying on the £450,000 figure alone.
The case illustrates why the CETV can be a useful starting point without necessarily providing the full picture.
Why does future income need to be considered?
As retirement approaches, understanding what an asset may provide can become just as important as knowing its current value.
A pension with a particular CETV may produce an income for many years, while property or cash received instead will affect your finances differently.
This becomes especially relevant where pension offsetting is being considered, with one person retaining more of the pension while the other receives a greater share of another asset.
Looking at future income can help you assess whether the settlement is likely to support your expected spending and retirement plans.
How can cashflow modelling help?
Cashflow modelling during divorce can help show how different settlement options may affect your finances over time.
Instead of assessing a pension purely by its CETV, the modelling can incorporate the income expected from pension benefits alongside your other assets and anticipated spending.
Different scenarios can then be compared: for example, you may be able to look at the effect of retaining more property against receiving a larger pension share and see how each option could affect your position in retirement.
This doesn’t replace the specialist pension or actuarial analysis that may be needed. It helps put that information into the context of your wider financial plans.
Final Thoughts
A pension CETV can be a useful part of a divorce financial settlement, but relying on the figure alone may give an incomplete picture.
The type of pension and the benefits it provides can make an important difference, particularly where defined benefit pensions or pension offsetting are involved.
Financial planning can help you understand how those pension benefits fit alongside the other assets in the settlement and what different options may mean for your future income.
Contact us to arrange a confidential conversation.
