Allowing for ill health in pensions divorce matters

This blog looks into the issues of ill-health in pension divorce matters, and how an expert witness might proceed.

By Jonathan Galbraith - March 2021

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A question that pops up from time to time in letters of instruction in divorce cases relates to one or other of the parties being in ill-health, and asks that we take account of this in the calculations that follow. This blog looks into these issues, and in particular how an expert witness might proceed.

In the first instance, it is useful to remember how the arithmetic works when it comes to pensions and ill-health. A pension is a post-retirement income payable for life, and it follows that the longer one lives, the more money is required, and vice versa. When it comes to purchasing an annuity, the insurers will sometimes provide enhanced terms for those with “impaired lives” i.e. a higher income will be provided to those where the insurer deems that life expectancy is subpar for someone of that age (by the same token, annuity providers will often give better rates to lifelong smokers than to non-smokers: it is the reverse of the position when one is purchasing life cover or health insurance).

Therefore, let us assume that we have a case where both parties are aged 59, husband is in excellent health and wife is in poor health. If it is ascertained that wife’s life expectancy is well below what might be regarded as typical for a 59-year old, it follows that she will require less in way of pension monies than does husband, as she will require a pension income for fewer years. To this end, any attempt by wife’s solicitors to get the expert to take account of her ill-health is likely to lead to her receiving less by way of pension rights (or offset capital) than would otherwise have been the case. Is this an argument that wife’s solicitors would really like to pursue? All too often, we see cases where the one side’s solicitor has lost sight of this and seems determined to push for an approach to be taken that will lead to a poorer outcome for his/her client.

Nevertheless, in my experience and regardless of what is required by the instruction, allowances made for ill-health tend to be minimal and the exception rather than the rule. Some of the reasons for this are below (and this list is by no means exhaustive):

  • Often what we are told is contradictory and inconsistent e.g. wife (age 50) in poor health and has very much reduced life expectancy…but assume that she retires at age 65
  • A detailed health questionnaire need be completed by the individual to allow the insurers (and by extension, the expert witness) to take account of health conditions: this requires information on diagnoses, medication taken, hospitalisations etc.
  • Many conditions from which people may suffer (arthritis, depression, anxiety etc) may well lead to a poorer quality of life for the individual, but—in the opinion of the insurers—do not give rise to a meaningful reduction in life expectancy that leads to enhanced terms being applicable
  • Further, it follows alas that as we get older, our health starts to deteriorate: what constitutes “normal health” for someone aged 40 is likely to be very different for one who is aged 80
  • Defined benefit pension schemes make a different allowance for the ill-health of their members, and may allow early retirement without actuarial reduction, but the circumstances under which this is permitted tend to be quite limited
  • Those pension schemes that permit the internal implementation of a PSO (e.g. the public sector ones) will not in general extend any ill-health provisions to ex-spouse pension credit members, and in turn it is not possible for the expert to allow for this

There are also the broader moral and philosophical questions to consider: one being whether it is fair that someone should get less by way of a pension credit due to being in poorer health than the other, and the second question being whether it is in the parties’ collective interests to transfer rights whose economic value is linked to future life expectancy (being the pensions) to someone who cannot expect to receive them for as long in retirement. It must be remembered that the only “winner” is the pension scheme or insurer where someone dies at a younger age than might have been expected.

Notwithstanding the above, if we are instructed to consider health issues and the impact that these may have upon the results then this is what we shall do: it must be understood however that the resulting impact may well be “nil” in terms of what it means for calculations of pension sharing or offsetting.

There are a couple of other issues that the expert witness may need to consider, and one of these is “deathbed divorces”. Where life expectancy is less than 12 months, HMRC will allow a full commutation of pensions not yet taken i.e. the entire amount can be cashed in. This may need to be factored in, as there are sometimes cases where terminally-ill individuals do get divorced for the purpose of marrying someone else. As ever in such cases, we don’t get into the “whys and the wherefores” of the divorce: that lies outside our remit as expert witnesses.

The other issue of note is that pension attachment orders (what we used to call earmarking) may be appropriate to consider in some limited cases where ill-health is pertinent. Such arrangements help to preserve pension rights where it is questionable whether the recipient of any such order will in fact live long enough to derive any pension benefits from this.

Given the slightly morbid nature of this blog, it’s always good to end on a happy note. Below is a story told to me by our CEO, George Mathieson, about a divorce case which dates back to his time as an IFA…

  • In 2005, a retired husband and wife were getting divorced.  He was in receipt of a pension of £11,000 pa, the CEV of which was £230k.
  • A 50% PSO was made in wife’s favour, so she received a pension credit of £115k, which she had to implement externally (in 2005, this meant buy an annuity). Husband’s income reduced to £5,500 per annum
  • Had wife been in “normal health”, she would have secured an annuity income of c. £4,000 pa i.e. a bit less than what husband retains
  • However, she was seriously ill with cancer at this point, and medically-underwritten enhanced annuity terms were sought
  • The insurer in question assumed that her future life expectancy was perhaps two years, and so offered her £40,000 pa for the £115k pension credit
  • Wife’s health then improved somewhat, and (at least as at 2019) she was still living, having received £40,000 pa for the past c. 15 years: not a bad return on £115k of pension credit!

It’s useful to consider who has gained and who has lost out here: obviously wife has gained in that the annuity terms were set when it looked as though she were terminally ill, and clearly her health has improved thereafter. Husband has lost out as clearly a much smaller PSO could have effected equality of income in retirement, on the grounds that for every £1,000 pa of pension he loses, wife was able to secure c. £7,000 pa of annuity income.

However, the big loser here has been the insurer, as it has paid out pension benefits of c. £600k on an initial premium of £115k. It follows that for every policy that an insurer writes—whether for an annuity, life insurance, house insurance etc—some will be profitable and others will give rise to large losses, with the former subsidising the latter. However, this was clearly an extreme case where, even with medical underwriting, the policy did not go quite as planned. All in all, I want to end by saying that if you are a solicitor and want us to take account of your client’s health when instructing us in a divorce case, i) it might make no difference to the results; and ii) if it does, the arithmetic might not go the way that you had anticipated. Therefore, please proceed with caution!

Jonathan Galbraith
Head of Product & Risk and Senior Report Writer

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