No one expects a relationship to break down, but when it does, we help guide clients to focus on resolving issues amicably and fairly. Where one of the spouses serves in the Armed Forces, or is a veteran, their Military Pension will often be a very valuable asset. As such, it is crucial to understand what the options are, and how best to protect the pension. Even if the divorce process is simple, do not leave the financial settlement to chance as a claim against a pension could be brought many years into the future.
Topics to be answered in this article
Options for dividing a pension
Pensions can only be divided by an order of the court. The most common type is a Pension Sharing Order (PSO). Once such an order is made, and Veterans UK have all of the necessary documents and charges paid, they will have 4 months to implement the terms of the order. At that point the ‘cash equivalent’ (CE) value of the pension will be recalculated, the recipient will receive a pension credit and becomes a member of the Armed Forces Pension Scheme.
Different types of pension scheme
There are multiple military pensions, but the most common are the AFPS 1975, AFPS 2005 and AFPS 2015. There is also the Reserve Forces Pension Scheme and others relating to specific groups, such as the Gurkha Pension Scheme. It is important to understand that the rules relating to the different schemes are complex and can vary quite considerably, especially when considering the benefits of each, and when those benefits can be taken. A good illustration of this is that under the 1975 scheme, a pension is paid immediately after a qualifying period of service (for example 16 years for officers and 22 years for soldiers in the Army) together with a lump sum payment. Under the 2015 scheme, there is no entitlement to an immediate pension for leavers under the age of 60. Between the ages of 40 and 60, however, they would be entitled to Early Departure Payments (EDP’s) if they have completed 20 years service, but these are not shareable. The recipient (usually the wife) of a 1975 pension will receive her full pension credit entitlement at the age of 65, along with her share of the lump sum provided the pension share was implemented before her husband left the services. Under the 2015 scheme, she would not be entitled to her full pension credit until State Pension Age, which for most people, will now be at the age of 67. Benefits may be taken at an earlier age (but not before 55) but will be actuarially reduced. These are just a few examples, so due to the complexity of Military Pensions, we advise clients to work with us to obtain expert guidance, whether that be from the Forces Pension Society with whom we have close links, or a Pensions on Divorce Expert (PODE) who will often be an actuary and can make detailed calculations based on multiple scenarios.
How long have you been married and what will my spouse receive?
The length of marriage can be a key factor in deciding how much pension the spouse will receive. The relevant period will usually start with the couples’ cohabitation (if this seamlessly flows into their marriage) and ends at the point of their divorce, although it is possible to argue that the date of separation, or the date of the Final Hearing in contested Financial Remedy Proceedings, should be used. It was commonly argued that any period of military service accrued before the marriage should be excluded when considering how much of the pension should be shared. There was, however, a move away from this following the Guidance on the Treatment of Pensions in Divorce 2019. The correct approach suggested in this advisory document, is that in most cases the needs of the parties will take precedence over ring fencing assets acquired before the marriage. This approach has subsequently been followed in a number of reported cases, such as W -v- C  EWCH. Although the current approach moves away from the relevance of the length of marriage, we have had success in arguing the contrary before judges and will often commision pension reports that calculate the benefits that would need to be shared based upon the exclusion of pre-marriage service. As with the division of other assets, the starting point would be an equal division, but each case is unique and we can advise on what might be fair and appropriate for you.
How much is your military pension worth?
It is common for service personnel to be a member of multiple schemes and a CE value for each will need to be obtained. There are also differences between how the 3 main pensions are valued. The pension values are often very significant, especially for Officers with a long period of service. Also, due to the actuarial way that service pensions are calculated, Officer level pensions are often overvalued and junior soldiers (corporal level and below) are often undervalued. And there can be other significant complications; for more senior ranks with many years service, especially following a promotion, the annual growth in the value of the Officer’s pension can exceed the annual pension allowance of £40,000 giving rise to an annual allowance tax charge, which can be tens of thousands of pounds. This is relevant on divorce, not only because of the timing on the implementation of any pension sharing order, but because Veterans UK can be asked to pay all or part of the tax in exchange for a reduction in benefits. If that option is rejected in favour of paying the additional tax directly to HMRC, this would be a liability that we would argue should be taken into account when dividing other assets.
Are there any other options?
Apart from PSO’s, it may be appropriate to consider the alternative of offsetting the value of the pension against other assets, typically equity in the family home, savings or investments. If there are sufficient other capital assets to set off against the value of pensions, then typically each party will retain their pensions intact and other assets are divided unequally to balance up the values to create the desired outcome. This can be a useful alternative to a PSO, especially if the priority of one party is to retain the family home and the priority of the other is to retain their pension intact. Such settlements should be considered very carefully, however, as often the longer term consequences can leave the wife (usually) with insufficient income in retirement, whilst the husband struggles to get back on the housing ladder. Further difficulties arise in deciding how the pension assets should be valued when comparing them to capital. Often we would argue that a discount should be applied to the value of the pension (thus benefiting the serving member) to reflect the fact that part of the benefit will be taxed upon receipt and that a pension entitlement has less utility than other capital.
Any other pitfalls?
There are many! One to be aware of is the potential impact on the delay between the implementation of the pension sharing order when the pension is already in payment. The reduction in the member’s benefits takes place from the Effective Date. However the order cannot take effect for 28 days after it is made, or the date of the Decree Absolute, whichever is later. In practice there is an administrative delay which can often take many months or even over a year in some cases. During this time the member receives his or her monthly pension income as normal, but is in fact being overpaid, even though the recipient spouse has yet to receive their benefits. All sums overpaid will then be recouped, often resulting in the member having to pay back thousands of pounds which may well have already been spent. In another scenario, the parties may have agreed that the member will pay spousal maintenance (periodical payments) to the wife in order to help meet her income needs. If the member’s pension is in payment, once the PSO is implemented, his income will reduce, often impacting his ability to meet his obligations to pay the maintenance. Even though the wife receives the benefit of the pension share, she may not be entitled to receive any actual income until years in the future. This can often result in an ‘income gap’ which should be factored into any negotiations on how the parties finances should be divided.
How can Goughs help?
What will happen to my armed forces pension on divorce is a simple question but it does not have a simple answer, hence the need for specialist legal advice. Goughs have experience with military divorces and are here to help. With the right support, you can still enjoy the retirement you have worked hard to secure. Call for free initial discussion.