Pension Sharing on Divorce – The treatment of AFP05
Chris Upfield, a specialist in armed forces pension-sharing arrangements and partner in the family team at south coast law firm Coffin Mew, has reviewed the various approaches which might be taken by couples undergoing divorce proceedings where there is an AFP 05 pension.
According to Chris, the differences in the new pension Scheme, when compared to AFP 75, cause a number of difficulties for Judges and legal practitioners in formulating an approach which achieves fairness between service personnel and their spouses at the time of divorce.
“Under AFP 75 there were already some issues which arose, such as the doubtful underlying accuracy of the Transfer Values (CETVs) produced, particularly in the case of service personnel leaving service in their early 40s,” says Chris. “The AFP75 pension and lump sum benefits could nonetheless be accessed immediately on leaving service, whereas the AFP05 pension is preserved to age 65 before it can be accessed.”
The compensation for the AFP 05 pensioner is that valuable EDP lump sum and income benefits can usually be accessed at a much earlier age. However, because these benefits do not form part of the pension, they cannot be made the subject of Pension-sharing orders. Therefore, the spouse of an AFP05 pensioner is potentially more prejudiced on divorce than the wife of an AFP75 pensioner.
So what approach might the Court take to AFP preserved pensions and EDP benefits?
Chris says: “In some respects it becomes easier to achieve a fair share of the preserved pension benefits. Because they can only be accessed from age 65 the CETV is likely to be significantly more accurate (in reflection of true underlying value) than under AFP75. Many of the same approaches are taken – for example, it is extremely common when assessing the percentage of any pension-sharing Order, to look only at the length of the marriage against years of pensionable service.”
For the reasons already mentioned, the EDP lump sum and income payments pose a more difficult issue. Under the Matrimonial Causes Act 1973, which dictates how Judges should determine financial settlements at time of divorce, the Court MUST have regard (amongst other factors) to “the … financial resources which each of the parties to the marriage has or is likely to have in the foreseeable future.”
An EDP lump sum and income stream is therefore a factor which a Judge must consider if it is likely that such a payment will be received in the foreseeable future. Yet it is often not known for certain at the time of a divorce whether an EDP will be received, or indeed when, and therefore every case has to be considered on the basis of its’ own circumstances.
“It is a reasonable presumption, though not inevitable, that serving personnel would not normally have converted to the new scheme were it not for the perceived benefits of accessing the EDP benefits,” says Chris. “If a Judge is satisfied that such benefits will be received, the Court could for example make a lump sum order payable to the spouse (perhaps in the same percentage as the Pension-sharing Order), couched in such a way to ensure that the order would not take effect (and thus be affordable) until the EDP lump sum was received.
“Alternatively a Judge might award a spouse a greater share of the house and other capital available at the time of the divorce in the expectation that service personnel would have the EDP lump sum to call upon later. These are just two of many possible approaches.”
The EDP income payments are a slightly different issue. They may form the only income available to retired services personnel who have been unable to obtain work in the civilian world – so why would it be fair to divert a proportion to the spouse automatically when the spouse may be in work with a good income?
“Therefore, there can be no standard approaches to AFP 05 on divorce,” warns Chris. “The circumstances of each individual couple will be looked at in deciding what the fairest approach to take is. It is therefore most important to seek advice from a solicitor who is conversant with both Armed Forces Pension Schemes.”