Pension buyout
Discussion
More? Are you saying you would rather have a £100k pension you can't touch for years than £120k you could use tomorrow?
The reason is divorce. Why wife is entitled to 50% of my pension. She (and more importantly my kids) would benefit greatly from her having cash. An option is to give her more of the house equity, while I retain my pension.
This would allow her to buy a home for my kids mortgage free. She would then have 25 years mortgage free to sort out a pension.
I would have have to take a mortgage to provide a home for my kids, which my income allows (hers doesn't yet). I would however have a pension.
It's all about providing two nice, modest homes for our kids as soon as possible.
The reason is divorce. Why wife is entitled to 50% of my pension. She (and more importantly my kids) would benefit greatly from her having cash. An option is to give her more of the house equity, while I retain my pension.
This would allow her to buy a home for my kids mortgage free. She would then have 25 years mortgage free to sort out a pension.
I would have have to take a mortgage to provide a home for my kids, which my income allows (hers doesn't yet). I would however have a pension.
It's all about providing two nice, modest homes for our kids as soon as possible.
But how much?
If someone offered me £90k cash today in exchange for a £100k pension I would bite their hand off. If offered £60k I wouldn't.
This really isn't a trick question. Just looking for what other people think is a fair percentage. My gut feeling is somewhere between 70 and 80.
If someone offered me £90k cash today in exchange for a £100k pension I would bite their hand off. If offered £60k I wouldn't.
This really isn't a trick question. Just looking for what other people think is a fair percentage. My gut feeling is somewhere between 70 and 80.
Simplest way would be to calculate the after tax current value of the pension, which simplistically is £100 x 25% + £100 x 75% x (1-20%) = £85k assuming 20% marginal tax rate after 25% tax free cash.
It sounds like you are suggesting applying a further discount for ‘time value’, ie the fact it’s locked up until retirement. I would suggest not including this as it’s probably balanced out by the growth that the fund will achieve over that same period.
It sounds like you are suggesting applying a further discount for ‘time value’, ie the fact it’s locked up until retirement. I would suggest not including this as it’s probably balanced out by the growth that the fund will achieve over that same period.
alock said:
But how much?
If someone offered me £90k cash today in exchange for a £100k pension I would bite their hand off. If offered £60k I wouldn't.
This really isn't a trick question. Just looking for what other people think is a fair percentage. My gut feeling is somewhere between 70 and 80.
I believe the accepted conversion is 4:1.If someone offered me £90k cash today in exchange for a £100k pension I would bite their hand off. If offered £60k I wouldn't.
This really isn't a trick question. Just looking for what other people think is a fair percentage. My gut feeling is somewhere between 70 and 80.
£4 pension = £1 property.
Do you have a solicitor involved?
NickCQ said:
Simplest way would be to calculate the after tax current value of the pension, which simplistically is £100 x 25% + £100 x 75% x (1-20%) = £85k assuming 20% marginal tax rate after 25% tax free cash.
It sounds like you are suggesting applying a further discount for ‘time value’, ie the fact it’s locked up until retirement. I would suggest not including this as it’s probably balanced out by the growth that the fund will achieve over that same period.
If we were both >55 then that calculation might be fair. It still seems too high at 42.It sounds like you are suggesting applying a further discount for ‘time value’, ie the fact it’s locked up until retirement. I would suggest not including this as it’s probably balanced out by the growth that the fund will achieve over that same period.
Lets some real numbers on it, assuming the money will be used to fund a home. We don't live in the PH dreamworld where we have a spare £100k to invest in a high-risk fund.
Currently as a couple we have £400k house equity and a £200k pension to split. I'll assume zero growth in house value.
Option 1. I buy her out for your suggested £85k.
On day 1 I have £115k cash and a £200k pension. I buy a £200k house with an £85k mortgage which is roughly ~£400/month (3%) from my net income.
Mortgage at 3% but with zero regular payments ~£420k after 25 years.
After 25 years I have a £200k house and a £420k pension. I've paid £35k mortgage interest.
Option 2. She takes half my pension.
On day 1 I have £200k cash and a £100k pension. I then buy a house mortgage free for £200k. I can then put £667/month into my pension (gross instead of net as a higher rate tax payer).
Pension at 3% but with monthly payments ~£500k after 25 years.
After 25 years I own the same £200k house, but now have a £500k pension.
(of course the compound interest calculator here might be wrong
https://www.thecalculatorsite.com/finance/calculat...
)
PurpleMoonlight said:
I believe the accepted conversion is 4:1.
£4 pension = £1 property.
Do you have a solicitor involved?
Solicitors are involved. We've both just submitted our Form Es. We therefore haven't got to this stage with them yet, but soon will. I just like to have some ideas in my head before hand.£4 pension = £1 property.
Do you have a solicitor involved?
Sorry to hear you are going through a divorce, at least it sounds as though it is being handled amicably.
I am not sure about your figures, but in essence if you can both walk away with mortgage free properties and £100k each in a pension it is not a bad result.
I assume that you have both agreed on a clean break divorce and you will not be paying spousal maintenance, as if not the 50/50 split is certainly not a given.
Equally, part of your pension fund may be a pre-marital asset for the purpose of the pension sharing calculation.
Obviously there are numerous factors that come into play when it comes to ancillary relief calculations, but keeping things amicable with a 50:50 split of assets may very well be less costly than a protracted contested divorce - with the resultant legal costs (not to mention the emotional impact for all concerned) so it sounds like you are both doing the right thing.
To address your original question, it is not possible to buyout a pension as you describe. There is therefore no discount whatsoever as the time limit restriction is equal for both parties (assuming you are the same age).
So the question you really need to be asking yourself is what is the better option; a £200k mortgage free home and £100k in a pension (with ongoing pension contributions being equal to what would have been mortgage repayments) or a £100k mortgage on the same home with £200k in your pension (and no further pension contributions due to mortgage repayments).
For current financial certainty the mortgage free home make great sense. However, as a higher rate tax payer you should consider that the value of the pension tax relief on your equivalent gross contributions (rather than net mortgage payments) together with the interest saved on the mortgage itself over the 25 year term you put forward should leave you financially better off in the long term.
Given, however, that your current priority is your wife and kids having more cash today (I assume to purchase a larger house or for other relevant financial reasons) then exchanging her share of the pension for cash from the property sale may be the best way of achieving this whilst giving you greater retirement certainty.
I hope that makes sense and is of some help. Just ask if you need any clarity or have further questions. And use Sarnie for the mortgage if you take that route!
I am not sure about your figures, but in essence if you can both walk away with mortgage free properties and £100k each in a pension it is not a bad result.
I assume that you have both agreed on a clean break divorce and you will not be paying spousal maintenance, as if not the 50/50 split is certainly not a given.
Equally, part of your pension fund may be a pre-marital asset for the purpose of the pension sharing calculation.
Obviously there are numerous factors that come into play when it comes to ancillary relief calculations, but keeping things amicable with a 50:50 split of assets may very well be less costly than a protracted contested divorce - with the resultant legal costs (not to mention the emotional impact for all concerned) so it sounds like you are both doing the right thing.
To address your original question, it is not possible to buyout a pension as you describe. There is therefore no discount whatsoever as the time limit restriction is equal for both parties (assuming you are the same age).
So the question you really need to be asking yourself is what is the better option; a £200k mortgage free home and £100k in a pension (with ongoing pension contributions being equal to what would have been mortgage repayments) or a £100k mortgage on the same home with £200k in your pension (and no further pension contributions due to mortgage repayments).
For current financial certainty the mortgage free home make great sense. However, as a higher rate tax payer you should consider that the value of the pension tax relief on your equivalent gross contributions (rather than net mortgage payments) together with the interest saved on the mortgage itself over the 25 year term you put forward should leave you financially better off in the long term.
Given, however, that your current priority is your wife and kids having more cash today (I assume to purchase a larger house or for other relevant financial reasons) then exchanging her share of the pension for cash from the property sale may be the best way of achieving this whilst giving you greater retirement certainty.
I hope that makes sense and is of some help. Just ask if you need any clarity or have further questions. And use Sarnie for the mortgage if you take that route!
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