Pensions are often one of the most valuable assets when dividing finances on divorce, however Armed Forces pensions have unique characteristics. It is highly recommended to seek early legal advice from a specialist divorce lawyer who is familiar with the Armed Forces Pension Schemes.
Pension sharing on divorce
On divorce, one of the financial orders that a court can make is a Pension Sharing Order. Pensions accrued during the marriage are usually equally shared, although the court may also take into account pre-marital or post-separation accrual if required to meet needs, and will consider the parties’ overall financial circumstances. The parties’ total pension provision shall be valued. Equality of pension provision (often with the aim of providing equal income on retirement) may be considered the fairest outcome, although the court has discretion, considering needs, age, health, contributions, marriage length and any pensions built up outside the marriage.
A pension sharing order usually means giving one spouse a percentage share of one or more of the other spouse’s pensions, taking into account the parties’ overall pension provision.
Pension attachment means a spouse receives a share of their ex-spouse’s pension income when the pension is in payment, but unlike pension sharing, does not give the receiving spouse independent pension rights and does not achieve a clean break.
Offsetting offsets the value of the pension against the other assets, subject to the significant health warnings. £1 of pension value cannot be treated as equivalent to £1 of capital. The pension in comparison to other capital is usually illiquid and pension income is subject to tax. The paper value of an AFPS scheme may also significantly understate the value of the guaranteed benefits.
Under the Armed Forces Pension Schemes, the spouse receiving the pension share will become a Pension Credit Member and effectively hold a pension entitlement entirely separately from the other spouse.
Obtaining the CEV
The first step is to obtain from Veterans UK a Cash Equivalent Value (known as a CEV or CE value) of your pension or simply ask for a valuation for the purposes of divorce. This is different to your annual pension statement. When received, this will put a value on your pension benefits, and it is not uncommon to see valuations of several hundred thousand pounds, after a full career.
An AFPS member is generally entitled to one free valuation a year unless the benefits are already in payment or the member is close to retirement.
You should also obtain valuations for any other pensions you hold, as should your spouse, so the overall pension position can be considered.
Armed Forces Pensions specifically
Dividing an Armed Forces pension does not mean just looking at its CE value on paper and the value of any other pension schemes the divorcing couple may hold.
The Armed Forces pension, in common with all defined benefit public sector schemes, produces a guaranteed pension income taking into account service, and depending on the scheme, rank or pensionable earnings.
Defined benefit schemes such as the Armed Forces Pension Scheme cannot be directly compared to other defined benefit schemes which have different rules and benefits. They should not be directly compared to defined contribution pensions (otherwise known as money-purchase schemes) which are more common in the private sector and personal pensions where the value directly reflects the money invested into the pension and the investment performance. This is because each scheme uses different actuarial assumptions, and the value on paper is not likely to exactly reflect the sum of money that would be required to purchase an annuity on the open market to produce the same benefits. An actuarial report from a Pension on Divorce Expert (PODE) is usually required to consider the actuarial factors between schemes and calculate the percentage share to equalise pensions fairly.
A PODE will also consider the impact of the 2015 Pension Remedy (known as the McCloud Pension Remedy) for anyone with eligible service between 1 April 2015 and 31 March 2022.
A particular feature of the Armed Forces Pension Schemes is that one spouse may be entitled to an early pension under the AFPS 75 scheme or an Early Departure Payment under the AFPS 05 and AFPS 15 schemes, well before the usual retirement or state retirement age.
Under the AFPS 75, the person who served may already be receiving their pension in their 40s or 50s. If a pension sharing order is implemented that their pension income will reduce, but their former spouse may not receive income from their pension share at the same time. They may have to wait until age 65 to receive it without reduction because the special right to receive the pension early arises from the member’s minimum service and does not pass to the spouse who did not serve. Earlier payment may sometimes be possible at a reduced rate.
Under the AFPS 05 and AFPS 15 schemes, Early Departure Payments are not subject to pension sharing orders but a spouse might seek a greater share of other assets, maintenance, or an adjustment to the pension share.
Where this income gap arises, specialist legal advice from a lawyer experienced in military pensions is required. Other options such as pension attachment offsetting, or maintenance may need to be considered.
Do I need a divorce lawyer and a Pension on Divorce Expert (PODE)?
A divorce lawyer with a specialism in Armed Forces pensions can advise on whether you require an expert report, the appropriate expert, what questions the expert should be asked to address, and what options are available in respect of sharing. There may be issues such as one spouse wishing to exclude part or the whole of a pension accrued before the marriage (which the court often considers includes seamless pre-marital cohabitation) and after separation. Your specialist lawyer can advise on what a court will likely take into account, considering all the circumstances, and every couple’s situation is unique. There are also questions such as whether the pension should be divided on capital values or on equalising income on retirement, and what retirement age the PODE should be asked to consider, particularly where there are schemes with differing usual retirement ages or a large age difference between the parties.
The divorce lawyer will work with the PODE. The PODE is normally jointly instructed by both spouses, and is a neutral expert, whereas a divorce lawyer will advise you, in your best interests, with the help of the PODE report. The divorce lawyer will also prepare the necessary court paperwork to reflect any agreement reached or order sought.
Advice
A pension is often one of the most valuable assets, and an Armed Forces pension particularly so. Seek early legal advice.
You may also wish to seek advice from the Forces Pension Society if you are the spouse with the Armed Forces pension.
If you are a member of the Forces Pension Society then please contact Rosalind Fitzgerald or Marc Etherington who offer free initial calls to members.
