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Calderbank letter
Where cases of divorce during ancillary relief are contested, a Calderbank letter is an important document for the parties seeking a resolution of the financial matters but in particular, they are used to limit the escalation of costs as is shown in the step-by-step guide. In England and Wales the normal rules for the court is to order the loser to pay the legal costs of the winner.

It is accepted that arbitration is less expensive than the court process and therefore in the vast majority of matrimonial cases the parties will settle at some stage during the proceedings before reaching a final hearing. A Calderbank letter is a written offer from one party to the other party to settle all the matters in the dispute on a "Without prejudice save as to costs".

This type of letter resulted from the decision in Calderbank v Calderbank (1975) where it was noted by the court that there should be a method available to the party making an offer to settle and for that party to be afforded protection against further costs. Either party is entitled to make a Calderbank offer whether they are the respondent or even the petitioner, at any time and as frequently as desired during the ancillary relief proceedings.

It is essential to have professional advice from a family lawyer when structuring a Calderbank letter as a poorly judged offer could result in a significant increase in costs being awarded against the party making the offer, were this offer to be rejected and the case to proceed to a final hearing. Where there are complex pension arrangements it is also important to know any adjusted CETV position before making or receiving a Calderbank offer, as this will certainly influence the final percentage.


Capital and interest
Where an individual has a lump sum and wants a guaranteed income for life, a purchased life annuity will pay an income that contains a capital and an income element. The capital element is treated as a return of the annuitant's original investment and is tax free. The income element is taxed as savings income at a 20% rate of tax for basic rate taxpayers. Higher rate taxpayers will pay a further 20% tax.

The amount of capital paid depends on the age and sex of the annuitant as well as the other benefits attached to the annuity such as a guaranteed period and with proportion added.

For an immediate needs annuity all the income is treated by the Inland Revenue as capital and there is no tax liability. This is because the income from the annuity is paid direct to the nursing care home, where an elderly relative now requires 24 hour care after suffering an illness, and the immediate needs annuity specifically covers the long term care costs.


Capital protection
This feature is unique to a purchased life annuity where an individual can use a lump sum to purchase a guaranteed income for life. Capital protection can be selected rather than a guaranteed period. A guaranteed period would continue to make payments up to 5 or 10 years after the annuity was purchased even it the annuitant dies.

Capital protection ensures that if the annuitant dies earlier than expected, the difference between the gross income received and the original capital to purchase the annuity will be paid as a lump sum to the annuitant's estate.

To provide income after the death of the annuitant, he or she can therefore choose between a dependents income (this being similar to a survivors pension), capital protection or a guaranteed period, all with different levels of protection and associated costs.


Carry back relief
Unlike a personal pension from 31 January 2002, retirement annuity policies (RAPs) can still be used for carry back relief. This means that a contribution actually paid in one tax year can be treated for tax purposes as having been paid in the previous tax year.

Tax relief will be granted in the previous year at the individuals marginal rate. The total contribution cannot exceed net relevant earnings (NRE) for the previous year nor can it exceed the unused tax relief for that year, the maximum being based on the individuals age as at the start of that tax year and their net relevant earnings in that tax year.


Carry forward relief
The relief for carry forward in respect of personal pensions was abolished from 6 April 2001. Carry forward can still apply to retirement annuity policies (RAPs) and will allow members of these policies to make contributions in excess of the normal maximum for their current tax year while using any unused relief from previous tax years. There are a number of conditions namely that:

Cash equivalent transfer value
A cash equivalent transfer value (CETV) is a lump sum value in today's terms of the rights accrued within a members pension scheme. It assumes the member is leaving service and makes a pension transfer of the pension fund to an alternative pension arrangement.

To calculate the CETV the scheme trustees will decide if the formula should make an allowance for discretionary benefits such as pension increases and in most cases they choose not to. Therefore the CETV usually does not;

This method is prescribed within the existing actuarial guidance note 11 (GN11). The cash equivalent transfer value will be subject to the minimum funding requirement (MFR) and if the fund value is in deficit, the pension transfer may reflect this as a percentage reduction.

In the case of divorce, the pension credit as the result of a pension sharing order may be reduced by the percentage by which the scheme is under funded at the date of valuation. If the payment of the CETV is delayed beyond the implementation period allowable by the pension sharing order, then the CETV must be recalculated. The higher of the recalculated amount and the original CETV will be paid with interest in line with regulations.


Clean break
In cases involving ancillary relief proceedings, a thorough or complete separation of financial matters from a former spouse is known as a clean break. Since 1996 the existence of an earmarking order has meant a former spouse has the right to benefit from a pension fund when benefits are drawn at retirement, so remaining connected to the former spouse. Both offsetting and pension sharing offer the opportunity of a clean break for both parties.


Commutation
At retirement an individual with pension rights can opt for a tax free lump sum, thereby give up a proportion of pension income. In general a cash commutation would represent the lump sum required to purchase a pension annuity sufficient to provide the given pension income at retirement.

In practice it is possible for this individual to use the tax free lump sum to buy a purchase life annuity that offers tax advantages over the pension annuity. In particular, most of the income is treated as a return of capital and therefore is tax free with the remaining interest part being taxed as savings income at 20% only.

This difference in annuity taxation between a pension annuity and life annuity means it is always preferable to take the tax free lump sum and use this to buy a purchase life annuity in order to maximise income at retirement.


Compulsory purchase annuity
A maturing defined contribution pension fund can withdraw a proportion of this fund as a tax free lump sum, however the balance must be applied to a compulsory purchase annuity. Usually under the terms of the pension, the Trustees for the benefit of the annuitant will purchase this annuity.

However, where the individual has made private provisions such as a personal pension or retirement annuity policy (RAPs), they can exercise an open market option and purchase the annuity from the provide offering the highest income, either as a conventional (standard) annutiy or a With Profits annuity. Usually they should seek advice from an annuity and pension bureau offering specialist advice from an IFA that has the qualification K10 (retirement options).

These annuities can be written on a joint life basis and therefore provide survivors pension in the form of an income for life. The value of this income can only be determined at the outset but is typically half or two thirds of the original annuity. The resulting pension for the member and eventually the surviving spouse will be taxed as earned income.


Concurrent membership
Where an individual is a member of more than one pension arrangement at the same time it is a concurrent membership. Prior to 6 April 2001 is was not possible for a member of a defined benefit occupational pension scheme, such as final salary, to also contribute to a defined contribution personal pension.

However, since the introduction of stakeholder pensions from 6 April 2001 an occupational pension scheme member earning less than £30,000 can now also contribute to a stakeholder pension as long as Inland Revenue contribution maxima are not exceeded.


Continuous service
A scheme member can qualify for continuous service of an occupational pension scheme such as a final salary pension in respect of pensionable service even though there has been a break of employment or if contributions are made to another scheme of the same employer. Pensionable service can be treated as being continuous if:

A members continuous service could be important as advantageous pre-existing Inland Revenue limits will apply to members that are pre-1987 and pre-1989 for continued rights, as specified by practice notes (IR 12 (1997)) and published by the Pension Schemes Office (PSO).

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