Public Sector Pensions on Divorce – A Comparison Guide

When people start divorce proceedings, their first concern is often the family home, savings accounts, investments and day-to-day finances. What is frequently overlooked, however, is the value of pensions.

For many NHS employees, teachers, police officers and members of the Armed Forces, a pension can be one of the most valuable assets accumulated during the marriage. In some cases, it can be worth more than the equity in the family home. That can come as a surprise, particularly where a pension is not due to be drawn for many years.

Is my Pension Included in the Divorce Settlement?

Yes. As part of a financial settlement, both parties are required to provide details of all assets, including pensions. The court will then consider those assets alongside everything else when deciding what a fair outcome looks like. This does not necessarily mean that a pension will be divided equally. Every family is different and the court will consider a range of factors including ages, income, housing needs and retirement provision when considering how to divide the assets between the parties.

Why are Public Sector Pensions Different?

Public sector pension schemes are often more complex (and valuable) than money purchase schemes (such as workplace pensions with Nest). The NHS, Teachers’, Police and Armed Forces schemes all have different rules regarding how benefits build up and when they can be taken.

Many public sector workers are members of pension schemes that have changed over time. Depending on when you joined your profession and how long you have worked there, you may have benefits built up across more than one pension arrangement.

For example, members of the Armed Forces may have benefits in the Armed Forces Pension Scheme 1975, 2005 and/or 2015. Likewise, NHS staff may have benefits in the 1995 Section, 2008 Section and 2015 Scheme, while police officers and teachers may also find that their pension benefits span both older and newer schemes.

This matters because different schemes can have different retirement ages, methods of calculating benefits and rules governing when pension benefits can be taken. As a result, what appears to be a straightforward pension on paper is often more complicated in practice.

It is also common for people to assume that because their pension statement provides a value, that figure tells the whole story. Unfortunately, it is rarely that simple.

Don’t Assume the Pension Statement Tells the Whole Story

When pensions are disclosed during divorce proceedings, pension providers will generally provide a Cash Equivalent Value, often referred to as a “CEV”. The CEV in basic terms confirms the value the pension scheme places on the benefits of your pension as at a specific date.

The CEV is an important starting point, but it does not always reflect the true value of the future retirement benefits that a pension may provide. This issue can be particularly relevant in public sector pensions.

As an example, two pensions with identical CEVs may ultimately provide very different levels of income in retirement. For that reason, in cases where pensions form a significant part of the family’s assets, it is often sensible to obtain specialist advice, usually with the involvement of a Pensions on Divorce Expert (PODE), before reaching a final agreement.

What are the Options?

In broad terms, there are three ways pensions can be dealt with on divorce:

• A pension sharing order, where part of one person’s pension is transferred to the other.
• Pension offsetting, where one person keeps more of another asset, such as the family home, in exchange for the other retaining their pension.
• A pension attachment order, which is less commonly used.

The appropriate approach will depend on the particular circumstances of each family and the overall assets available. That said, the most common outcome is a Pension Sharing Order, which reflects the approach generally supported by the Pension Advisory Group (PAG) guidance relied on by the Family Courts.

One of the key principles to understand is that £1 of pension value is not necessarily equivalent to £1 of cash or equity in a property. As a result, pensions and capital assets cannot always be compared on a like-for-like basis. This is one reason why pension benefits are considered separately from other capital assets. Rather than viewing a pension simply as part of the capital available for division, it is regarded as a future income stream designed to provide financial security in retirement.

Whilst the starting point in sharing pensions is usually to achieve equality of incomes in retirement, the court retains a wide discretion and may depart from an equal division where the circumstances justify doing so.

Looking at the Bigger Picture

One of the most common mistakes people make during divorce is to focus entirely on capital assets that are available now (such as real property). Whilst property may be the most visible asset, pensions often represent long-term financial security and can be worth hundreds of thousands of pounds. It is not unusual for one spouse to be keen to retain the family home for example whilst allowing the other to keep their pension. In some circumstances that may be entirely appropriate. In others, it can result in one party being asset rich in the short term but facing a significant shortfall in income in retirement.

This is why considering the whole financial picture rather than viewing each asset in isolation is needed.

A fair settlement is not necessarily one where every asset is divided equally. Instead, the court’s objective is to achieve a fair outcome having regard to the circumstances of the family.

Final Thoughts

Public sector pensions are frequently among the most valuable assets considered during divorce, yet they are often the least understood.

Whether you work in healthcare, education, the emergency services, the Armed Forces or another area of public service, it is important not to overlook the role your pension may play in any financial settlement.

Taking advice at an early stage can help you understand your options, avoid costly mistakes and ensure that any agreement reached properly reflects both your current circumstances and your long term financial future.

This article was written by Kirstin Sibley, Senior Associate in our Family Law team. If you need advice on this topic, please contact us or fill in the form below.