Lockdown has unarguably put a great deal of pressure on relationships and this pressure will, in some cases, result in the dissolution of marriages and civil partnerships. This is quite stressful enough without adding myths about the impact on pensions to the mix.
In this article we seek to bust a few of those myths and to explain how Pension Sharing Orders (PSOs) work. This article makes no attempt to second guess what MOD might do as a result of the McCloud case and the transition rules affecting transferees to the public sector pension schemes introduced in 2015. Once MOD plans are clear, we will, of course, explain them.
When a relationship is legally dissolved, be it a marriage or a civil partnership, it is necessary for the couple to divide their ‘matrimonial property’, and pension rights form part of that property. In Scotland the pension component of matrimonial property is limited to that earned or purchased during the marriage or civil partnership. In the rest of the UK the whole of the pension is taken into account. Some men complain that their wife is after their pension which she will enjoy on top of her own occupational pension. This is wrong. In assessing matrimonial property the property of both parties is included – the law is gender-blind when it comes to what constitutes an asset.
Some people believe that the Court will carve up the matrimonial property and that the pension is always split. Again, this is not necessarily the case. If a couple can agree on how this split should occur the Court will not normally intervene. It is not inevitable that the pension is affected. When they cannot agree, the Court will decide.
Prior to 1 December 2000, courts could award an Attachment Order (AO) in England, Wales or Northern Ireland or an Earmarking Order (EO) in Scotland. Payments resulting from an AO are not paid until the pension benefits are payable to the member and they stop when the member dies. The tax liability for these payment remains with the member. The EO provides the ex-spouse with a share of the member’s pension lump sum when it becomes payable. Both Orders have the disadvantage that they can be revisited and varied, which leaves already aggrieved people feeling vulnerable to further ‘assault’.
PSOs were introduced from 1 December 2000. Under Scottish law the value of the PSO is a specific monetary value whereas in the rest of the UK it is expressed as a percentage of the member’s pension rights. The expression of the PSO as a percentage causes confusion. It is generally believed that a 50% share will result in the couple each receiving half of the original pension in the bank each month. This too is not necessarily the case because factors other than the straight percentage share of the pension pot need to be taken into account – for example, the age of the parties. It can also make a big difference when in an AFPS 75 member’s career the order is made – if it is after the Immediate Pension Point, the impact of the PSO may increase significantly over time.
PSOs cannot normally be revisited once implemented and the tax liability on the pension share becomes the liability of the Pension Credit Member or PCM (as the person awarded the PSO is called).
Once the PSO is implemented, the ‘ex’ becomes an AFPS member in their own right, but in a limited way. The PCM cannot add to the value of their pension share, join it with another pension within the scheme or transfer it out. In the event of the PCM’s death, the value of the pension share is NOT restored to the Pension Debit Member or PDM (as the person whose pension has been shared is called).
PCMs often argue that, because the PDM’s pension is in payment, theirs should be too. Wrong! They are governed by the scheme rules relating to pension age for their particular type of membership. PSOs made from 6 April 2006 are payable at age 65 and Orders before that date were payable at age 60. However, PSOs may be claimed as early as age 55 at a reduced rate.
The PDM is not tied to the scheme by PCM and his or her rights under the pension scheme are not inhibited. The PDM can leave the scheme, transfer the benefits out or retire on a pension without any reference to the PCM. Further, the PDM no longer has tax liability for the value of the pension share which is now the property of PCM.
In order for lawyers to work out a settlement to put before the Court, or the Court to impose one, a statement of the value of pension rights is required. This is called a Cash Equivalent Value (CEV). There is more than one type of CEV and it is necessary to specify that you require it for divorce purposes. If the wrong type of CEV is produced, the Court may well refuse to accept it and that can build in delays. The current charge for a CEV for divorce purposes is £180.
If you are a member of the Forces Pension Society and have questions on this or any other pension issue, please contact us at firstname.lastname@example.org. If you are not a member but would like to learn more about the Society, click here