Pensions can be a tricky area to deal with during a divorce, often because they are not properly understood. There are many different types of pensions and one of the most challenging, and interesting, types to deal with are military pensions – army, naval, royal air force. This blog only touches the surface of this area but hopefully will give guidance on things to think about when dividing a military pension on divorce. This blog is one of three posts, the second post will highlight a case example and the third will give you specific questions to ask if you are separating from your spouse and have an armed forces pension.
There are three ways pensions can be dealt with during a divorce:
- Pension attachment
- Pension sharing.
Which is most suitable will often require specialist advice from a solicitor and a pensions financial adviser. The main consideration during this process is what is important to the client when dividing the assets.
Offsetting is straightforward whereby one party keeps the pension in return for the other keeping an alternative asset, usually the home. Offsetting would mainly be used when the couple have children and it would be difficult to divide the non pension assets, providing housing for everyone on divorce. I regularly find that the main carer of the children, who will usually have a smaller income and therefore lower mortgage capacity, values keeping equity in the home. This deals with their immediate need over having a share of the pension. Offsetting is not a particularly mathematical approach and is instead looked at as a balancing of needs.
Armed forces pensions explained
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Pension Attachment Orders
Pension attachment orders are rarely used, but they are something which should be considered in cases dealing with armed forces pensions which predate 2015. A share of the pension holder’s pension is allocated to the spouse and when the pension is drawn down the spouse will receive a percentage of the lump sum and the monthly income. Pension attachment is usually not very popular as the pension holder has control of when it is drawn down and what amount is taken as a lump sum. Also if the pension holder dies, the pension can be lost. Normally the pension attachment order would be set up so that if the owner died before the pension was drawn down, the death in service benefits are paid to the spouse.
Pension Sharing Orders
Pension sharing orders are by far the most common way of dividing pensions. A pension sharing order can only be implemented after the decree absolute has been pronounced in divorce proceedings. It has the effect that a percentage of the pension is transferred to the spouse who then has control of the pension; i.e. it can be drawn down based on their retirement age and they can choose the amount of their lump sum. Pension sharing of armed forces pensions means the pension has to remain within the armed forces scheme and cannot be added to.
So, why wouldn’t everyone choose the pension sharing order if they were not to offset? This is where the Early Departure Payment “EDP” comes in. Members of the armed forces who have served 18 – 20 years plus (the pension scheme they are a member of effects how long the service must be) are entitled to an EDP. The EDP is a lump sum and monthly income from the date they leave the forces until they reach retirement age. For members of the older armed forces scheme (“AFP05”) this is based on a percentage of the pension they have accrued. Therefore, making a pension sharing order can reduce the EDP which has a more immediate impact on the assets.
As you can see, there is a lot to be considered when dividing an armed forces pension upon divorce. And, if the above wasn’t enough, one final point to be aware of for armed forces pensions is that the valuation the armed forces pension provider gives (known as the Cash Equivalent Value “CEV”) is often thought to be much lower than the CEV of other pensions in the private sector because of the value of the benefits the armed forces pensions provides.
Is your head swimming? This is just an overview of things to think about when sharing armed forces pensions on divorce. I have dealt with many armed forces pensions on divorce and if you would like advice tailored to your situation then please do not hesitate to contact me via e-mail or call 02392 000086.