February 2025

12.5 Where there is a clearly diagnosed medical condition with a substantial probability of impaired life expectancy, this should be reflected in the calculations.

12.6 A PODE report should clearly state any assumptions made about health and, where allowance has been made, the approach taken and the effect

Health issues can potentially have quite a large impact on the division of pension rights in a case, depending upon the severity of this condition, given that most Pensions on Divorce Experts (PODEs) are likely use market annuity rates in their calculations, either when estimating an appropriate capitalised value to place on a future pension income stream or to identify the fund of money needed at retirement to secure a pension income of a given level.

The reason that health issues can affect the calculations is that if an individual suffers from poor health to the extent that their life expectancy is likely to be affected, many insurance companies will offer an enhanced annuity rate to allow for a shorter expected period in which the annuity will be in payment. With an enhanced annuity rate, the individual will be able to purchase a higher annual pension income for a set amount of pension fund spent on the annuity.

The most common qualifying health conditions listed in LV’s “Guide to Qualifying Medical Conditions” are:

• Heart conditions
• Strokes
• Cancer
• Diabetes
• Lung disease
• Multiple sclerosis
• Parkinson’s disease
• Kidney disease
• High cholesterol
• High blood pressure

This list is not exhaustive, however, and there are other conditions, for example Chronic Obstructive Pulmonary Disease (COPD), which can result in an insurer offering an enhanced annuity rate. Most insurers will also offer an enhanced rate to a pension holder whose Body Mass Index (BMI), that is [weight (kg)] / [height (m)]², is below or above the ‘healthy to overweight range’ of 18.5 to 30. Enhanced rates will usually also be offered to long-term and heavy smokers, particularly if they are continuing to smoke at the present time.

Typically, the level of the enhancement will depend on the seriousness of the condition and can range from the annuity rate being enhanced by only a few percent (for less serious conditions which are only expected to have a small impact on life expectancy) to around 50% or even higher (for very serious conditions which are expected to have a large impact on life expectancy).

There are two main ways in which this will affect our pensions reports, which I will explain in turn.

Estimated annuity rates when considering equalisation of incomes

If one party in a case has a defined contribution pension and we have been instructed to consider settlement based on pension sharing to equalise the parties’ estimated future pension incomes, then we will assume in our calculations that they will obtain a pension income from their accumulated pension fund at retirement by way of annuity purchase. The main reason for this approach is that unlike other ways in which they might be able to utilise their defined contribution pension fund (such as pension drawdown), this offers a guaranteed income for life and so can be fairly compared to other future pension incomes.

If an individual suffers from a health condition or meets other lifestyle health criteria, they might be eligible to receive an enhanced annuity rate, enabling them to obtain a higher pension income per amount of pension fund than would be the case were they not in ill health. This can also affect the ex-spouse of the pension scheme member where they do not have a defined contribution pension initially, as following a pension share, they may receive an external pension share which needs to be transferred to a pension arrangement of their choice. In this circumstance, we would generally assume that the transferred pension fund will be invested in a defined contribution pension fund, so our calculations will also be affected by health conditions in this case. As a result, if we are considering pension sharing to equalise pension incomes, then the estimated share required might be different if the ex-spouse has a health condition, since a given amount of pension fund might produce a higher estimated pension income for them compared to their former partner. This may often result in a lower percentage pension being awarded to the ex-spouse when equalising incomes as the ex-spouse is able to secure an annuity income in retirement on more generous terms and consequently does not need as large a pension fund to be transferred to them.

Estimated annuity rates used to value pensions

If placing an assessed value (sometimes referred to as an Actuarial Value or Market Value)  on a defined benefit pension then our standard approach is to use the Defined Contribution Fund Equivalent (DCFE) method, which estimates the cost of obtaining similar pension benefits on the open market as if purchasing these pension benefits with a defined contribution pension fund. This will use an annuity rate together with some assumptions of future market conditions to value the expected future income from a pension, by estimating the defined contribution fund which would be needed to purchase similar pension benefits.

If an individual has a health condition such that they will be able to obtain an enhanced annuity rate, this will therefore affect the annuity rate used when placing a value on their pension rights. As a result, it will be cheaper to provide them with the same estimated level of pension income than had they not been eligible for an enhanced annuity rate and so the value placed on their pension rights would be expected to be lower than if they were not in ill health. This can of course mean that the estimated required share to equalise the capital values of the parties’ pensions may be different if one party is in ill health, since that party’s pension rights may have a lower estimated value.

Health issues can also affect the capitalised value of an internal pension share awarded to a party in a defined benefit pension scheme (where the ex-spouse becomes a member of the same scheme that the transferring member is in). In this case, the appropriate percentage pension share could be impacted where capital values post share are being equalised, if a party in ill health is expected to receive an internal share of a pension.

Whilst this article is only intended to provide a general discussion of health issues, it does illustrate the importance to the instructing parties of flagging up issues of this type to a PODE where a report is being sought, to advise on appropriate pensions division for divorce settlement purposes.