Armed forces pensions on divorce
It is not uncommon for the value of a spouse’s Armed Forces Pension Scheme (AFPS) fund to be the largest matrimonial asset. How then should it be treated by the parties when trying to achieve a fair financial settlement? The main options currently available are:
This is where the value of the pension fund is offset either in full or in part against the value of other matrimonial assets. In a simple case, for example, the AFPS member might preserve a greater share of his or her pension in return for their spouse having a greater share of other assets.
2. Pension Attachment
Also often referred to as earmarking. This provides either a future lump sum or an income stream for the AFPS member’s spouse.
3. Pension Sharing
The ex-spouse receives a pension credit and, in effect, becomes a member of the scheme. This enables a clean break and provides good benefits at retirement, including the ability to take the pension income early (subject to scheme approval, reductions, and the minimum pension age).
If the pension sharing takes place before the member of the scheme retires, the ex-spouse will also have an entitlement to a lump sum, although in the ‘new’ AFPS 2015 (see below) pension income has to be exchanged to achieve this.
There are many difficulties that can be encountered, and often the choice is not an easy one. Here are just a few examples:
An AFPS member may have left the forces and be receiving a monthly pension payment that makes up a proportion of their income.
If a Pension Sharing Order is implemented, their pension income will immediately reduce but their ex-spouse, who now has the benefit of a pension credit, will not be able to take their pension income from the scheme until they reach their normal retirement age (or 55 if they decide to accept a reduced sum in return for obtaining the benefits earlier).
This can cause an income shortfall that may impact on both parties.
The value of the AFPS fund may be significant and, if offsetting pound for pound against other assets, may leave the member with little or no capital.
It is normal for a discount to be applied to the value of the pension to take account of the taxation that the fund will be subjected to when received as income, and also to reflect the greater flexibility and accessibility of other assets in comparison to a pension.
Disputes often arise about the amount of discount that should be applied.
A Pension Attachment Order does not allow a clean break between the parties, with the pension benefits received by the spouse being dependent on the retirement of the pension member.
The benefits are also lost on the member’s death (although the lump sum death benefit may be attached), or the ex-spouse’s remarriage (in the case of income).
The AFPS member may have accrued pension benefits prior to the marriage, either from the date of joining the services, or possibly aged 18 or 21 if a member of the AFPS 75.
Issues may arise as to whether it is appropriate to exclude the pre-marriage service. Similar arguments are often raised in relation to post-separation service.
The ‘new’ AFPS 15
When considering the future benefits that a member will be entitled to, it is important to be aware of the recent changes brought about with the introduction of this scheme. The most significant are:
‘Final salary’ is replaced by the career average salary, revalued for inflation-proofing, rather than the actual final salary at the date of leaving the forces.
The normal retirement age is increased from 55 to 60 – or to State pension age for deferred members.
The annual accrual rate is improved from 1/70th to 1/47th, although the automatic tax-free lump sum of three times salary is removed and replaced with an optional lump sum commutation at a rate of 12:1 (subject to limits).
Early Departure Payments are paid after 20 years’ long service and reaching the age of 40, rather than 18 years under AFPS 05 – and they continue until 60, not 55.
April 2015 pension freedom reforms
The AFPS is a ‘defined benefits’ pension scheme, and the majority of the 2015 changes do not apply to it. It is common, however, for AFPS members to have accrued funds in a ‘defined contribution’ pension scheme after leaving the AFPS, and for their spouse to have a ‘defined contribution’ pension scheme as well, so the reforms may still be relevant to military families.
Amongst the options now available to defined contribution pensions are:
Taking some or all of the pension fund (above the 25% tax free entitlement) as a further lump sum, subject to tax.
Leaving the fund in place and drawing down income rather than buying an annuity.
Taking the whole value of the fund as cash if it’s worth less than £10,000, up to a maximum of three such funds.
On the death of the member, leaving the remainder of the fund to their family, subject to different tax rules depending on the age of the pension member.
Some divorcing couples might choose a creative way of dividing their pensions to maximise the higher guaranteed pension income that is likely from the AFPS, whilst at the same time accessing the maximum amount of cash as a lump sum from their defined contribution schemes.
They may also be able to maximise the benefits to be passed on to their children, possibly as a tax-free lump sum, in the event that one of them dies prematurely.
A further consideration is that many higher-ranking officers may find the value of their pensions will exceed the Lifetime Allowance (LTA), which reduced to £1m in April 2016. If so, complicated tax rules are applied which could result in their lump sum payment being partially taxed at 55%, and their pension income reduced to pay an LTA tax debt.
One possible way to avoid this would be to have a Pension Sharing Order so that part of the value of the AFPS fund is transferred as a pension credit to their ex-spouse.
We are not pension experts. No solicitors are! What we can do, however, is guide the parties in the right direction by identifying the issues they should be considering, and refer the case, if appropriate, to a pensions expert or actuary.
They will give the best possible advice, often in the form of a pension sharing report, which can be hugely valuable in negotiating a fair financial settlement.
We also work closely with specialist financial advisers and can identify when it would be appropriate for the AFPS member to seek assistance through the Forces Pension Society (FPS). We also keep up to date with latest AFPS developments by subscribing to Pennant magazine, produced by the FPS.
As part of our commitment to the Armed Forces community, we offer all its members (service personnel, veterans, spouses, reservists and MoD personnel):
An initial appointment free of charge, face-to-face or by telephone, at a date and time convenient to you, if necessary outside business hours.
A discount of 10% on all Goughs’ fees for work done on your behalf.
Fixed fees for some areas of work.
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