This was a common method for making an offer prior to The Family Proceedings (Amendment) Rules 2006. Where cases of divorce during ancillary
relief were contested, a Calderbank letter was 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. In England
and Wales the normal rules for the court were to order the loser
to pay the legal costs of the winner. However, as is shown in the step-by-step
guide, this approach was amended with the Family Proceedings Rule
2.71 where the general rule in ancillary
relief proceedings is the court will not make an order requiring one party to pay the costs of another party.
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 was 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 was entitled to make a Calderbank
offer whether they were the respondent or even the petitioner,
at any time and as frequently as desired during the ancillary
It was essential to have professional
advice from a family lawyer when structuring a Calderbank
letter as a poorly judged offer could have 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.
As an example of how a Calderbank letter worked, party A (usually the wife)
claims a sum from party B (usually the husband). Party B makes
a Calderbank offer of 60% in settlement of all financial matters.
Party A rejects the offer and the court eventually awards
party A no more than 60%.
In this case party B will pay party A's legal cost up to the
date of the Calderbank offer but the court will almost certainly
order party A to pay for the legal costs of party B from the
date of the Calderbank letter to the final hearing as all
legal costs accrued since that date were due to party A's
refusal to accept the offer. If on the other hand the court
awards party A 61% or more, then party B will be liable to
pay party A's costs prior to and after the Calderbank offer.
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 annuities such as a guaranteed
period and with
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.
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 life 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.
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.
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:
||the RAP scheme member must use the
maximum contribution for the current tax year before using
||the scheme member has net relevant
earnings (NRE) in the carry forward tax year;
||Any unused relief, starting with the
earliest year of the previous six years can be carried
||The amount of unused relief for carry
forward is calculated using the maximum allowances and
percentage, based on the members age, of NRE for each
of the previous six years;
||Tax relief is limited to the available
contributions up to the level of taxable earnings in the
current tax year.
For a public service scheme such as the civil service, NHS,
teachers, police, fire services or armed forces it is only possible
to make an internal transfer on divorce. Therefore where the public service
scheme administrators have given a value of the pension
rights, this represents a cash equivalent value (CEV) because
it is not possible to transfer the rights to another pension
In this case the spouse can only become a member of the scheme
in their own right and receive benefits to the equivalent of
the pension credit that they receive as a result of a pension
sharing order. If the individual is in a public sector scheme
such as a local authority, the spouse will have the choice as
to an internal or external transfer.
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
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;
||Make any allowance for lump sum death
||Consider widows pension or dependants
||Any future increases in benefits of
the member as a result of the likely increase in earnings
up to retirement
||Take into account the tax implications
of pensions as opposed to a cash settlement on divorce;
||Consider the associated pensionable
||Consider the significance of distortion
due to the current funding position of the scheme.
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,
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.
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
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
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 pension
annuities. 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.
When purchasing an annuity
the individual has the option to search for the highest annuity rates using an open market option, however, learn more about annuities, compare annuity rates and before making a decision at retirement, secure a personalised annuity quote offering guaranteed rates.
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)
annuity 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
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. When buying a pension annuity retirement the individual has the option to search for the highest annuity rates using an open market option. Learn more about annuities, compare annuity rates and before making a decision at retirement, secure a personalised annuity quote offering guaranteed rates.
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.
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:
|| The member is transferred from the
employment of one company to another that also participates
in the same employers pension scheme, such as is the case
with a public
||The scheme member could be absent from
work due to ill health, on maternity leave or taking a
||A member could leave the pensionable
service of one scheme and join that of another yet these
companies are subsidiaries of the same or associated
employer and therefore connected.
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).