Army pension

Hi Didojane & Phatasphuk,

I believe that in the main you are referring to fairness and equality from a decent and moral standpoint. You raise the issue of income equalisation

“…All I know is dont want to be greedy so surely equal income would mean just that no one better off than the other both exactly the same to me that seems fair but I would like some feed back on this as I really am struggling with what seems fair and reasonable to me may not be to some one else. …”

As you suggest, it is rarely possible to achieve total equality in terms of income. Retirement age differentials usually mean that one party is able to retire before the other, but it depends on the scheme in question.

The following might help in putting things into some sort of perspective.

Pre-divorce one party might have built up a pension entitlement. Presumably the intention is that when that person reaches retirement age, the pension will be drawn and the income enjoyed by both parties. If the pensioner dies either before or after retirement, the other party usually gets a reduced pension for the remainder of their lives.

On divorce, the pension built up through to the date of divorce might be shared between the two parties. If the value of the pension (CETV) is shared equally between the two parties 50:50, it is as you say most unlikely that each party will receive the same pension income. This is where pension-sharing reports become important, as the aim is often to produce a share that will result in equality of income and actuarial pension sharing reports can do the relevant calculations. However, the question then arises as to what does equality of income mean.

For example, if we assume that both parties are the same age but the scheme rules mean that one party can retire at 50 whilst the other will have to wait until they are 60, you can only equalise income at the point at which they have both retired. From an actuarial perspective, that is relatively straight forward, but it does mean projecting forward the two pensions several years into the future. So, this gives a potential pension share required so that both parties are receiving the same pension (from the pension pot built up to the point of divorce) when the second party can retire; in this case at age 60. That is fair in a way, but what about the fact that one party will receive their pension ten years earlier? This requires another set of calculations that effectively adjusts the sharing order to compensate for the fact that one pension is payable for ten years before the other. We call this “capital equalisation” because technically, the result is to equalise the pensions on their post-pension-sharing capital values.

In my view, these final calculations bring things much closer to the pre-divorce position. This is why we have now moved to showing pension shares for both income equalisation and capital equalisation in our pension sharing reports. Whether the parties concerned, their lawyers and the Court consider one basis fairer and more equitable than the other is for others to decide.

Peter.

P.S. I’ll post separately but in the same thread on the subject of future increases and whether they are taken into account.

…….. FUTURE SERVICE & CALCULATING VALUES

It is often said that independent pension valuations incorrectly take into account the value of pensions that will be built up in the future; after the marriage has ended. The implication being that to do so is incorrect as in all fairness only the pension built up through to the point of divorce should be shared. As with many pension related issues in divorce, the problem starts with the CETV. CETVs are calculated as if the member has left service. For very boring technical reasons, this means that the pension is automatically under valued

The confusion that arises when an independent valuation is done can stem from the quirks of final salary pensions. To do the valuation correctly it is essential that the correct facts be used. One of which is that the member is still in service. This has two significant effects. Firstly, in the uniformed services pension schemes, someone who is still in service can retire earlier that someone who has already left service. That in itself makes the pension more valuable. Secondly, and this is where confusion sometimes arises; the pension built up to the current date is actually increased in value by future service. Ignoring these two factors when calculating valuations can result in unfair and unequal settlements, which is why pension–sharing reports typically make assumptions about future service. That is not the same as including the value of future service in the calculations.

I have explained this very badly, one of my actuarial colleagues would do it much better, but for the moment, you are stuck with the monkey not the organ grinder!

Peter.

Thanks Peter.
A very interesting and infomative article that makes things a lot clearer.
Back to my devils advocate bit again,
When you get your absolute there is a paragraph in it the says along the lines of...it is as if the ex spouse is dead with regard to any future claims... or something like that, so should this not be the same for pensions.
Service personel get their pension early to compensate for reduced earning potential for various reasons.
Why should pensions be valued any differently to any other asset ? as i said before future values don't come into play for anything else, eg, the ex wife generaly gets more than a 50% share of FMH which is an appreciating asset.
I understand that a pension is a future income for both parties in the big scheme of things, but a house could be seen as a roof over the head for both parties "until death do us part" as well, so the same argument could apply, could't it ?
So we have equality of income from pension but not equality in anything else.
Add to the mix that ex spouses can now get their share at 55yrs and the equality of income gets even more complicated.

You make some good points Phastasphuk, but the more I hear about pensions the less I understand! You made a point at some stage that there is little sense in paying for a actuary report if you are just going to ask for 50/50 split. This had been my reasoning initially and I thought we might just agree the split and save some money.
However what other people seem to be saying is that the CETV is taken, split in half, and then that half is used to provide a pension for the wife at 65. The wife in this scenario would get less than the serviceman because the same money buys less pension for women, but also because CETVs are seriously undervalued.
I completely agree with you about future pensions considerations and in my case I will be asking for half of my STBX's at the time of divorce but it kinda sounds as if, if I do not shell out for a proper valuation then I will be well and truely shafted!

I think one point to make in respect of Phastasphuk's "devil's advocate" point is that pensions are inherently different from any other type of asset, so why assume that the rules that apply to other assets should apply to them? Pensions are, after all, all about "future value": they're of very little actual use until retirement! So it would, in some ways, be mad not to look at the future.

You can sell a house, you can't sell a pension. A house can be valued now, the value is utilisable now. With a pension you are making projections about something that is only of application in the future.

And, as Peter has said, the whole idea of "value" with a pension can mean many different things. Unless it is a very simple money purchase scheme, value has little obvious meaning. What is being valued is often an estimate of the probable value to the recipient of the benefits that they will receive, which takes us closer to maintenance issues than capital issues. In the main, what you are dividing up is the right to an income, not "capital" as such at all (ignoring lump sums for now).

Do service personnel get early pensions to compensate them for reduced earnings potential? Or just because the Govt doesn't want to employ 55yr old+ soldiers? I know lots of ex-Forces who earn very comfortably after leaving the Forces, often better than other people with less training opportunities. I don't knock it, but that wouldn't, in my personal view, justify their pension rights being more protected. Its a perk of the job, and one I expect they sensibly take into account when joining up. We could all have done the same if we wanted those pensions...

And as for Penny10p saying "the more I hear about pensions the less I understand" - join the club! Its just that the more you learn, the more you understand why you don't understand...

Hi penny10p,
service pensions don't have a pot of money the pension is based on a percentage of the service persons pay rank at the time of discharge and is index linked.
Take what happened in my case, i was in reciept of my full pension before the Consent Order, the pension was split 50/50.
My monthly pension then dropped 50% immediatly, what happens then to the other 50% i do not know.
My ex wont get her 50% until she is 65 so if hers is index linked which i think it is, she will still get the same amount as i will be getting at that time.
The difference is that i am getting my 50% now.
I will now give some figures for illistration...

Pension pre split £640 after tax until 55yrs then index linked

Pension post split £320 after tax etc..

So i have £320 more than her until she gets hers(+indexing)so to equalize you only have £320 pounds to play with (how much of that will a judge award for the sake of equalisation ?)
Bearing in mind any that he does is less for spousal maint that you will receive now not at 65yrs old, plus the cost of the reports, longer court sessions, barristers, soliciters letters, is it worth it or should you just go for the percentage split plus SM and save a shed load of time and money ? That is the question i would be asking.
Please don't take this as advice it is just my situation for information but i think it is good to see some real figures put to it.
PS. the fugures are real for an Army SSgt left service 2007 with full commutation, goes without saying that these will be different for all but are used as a guide.
Finally if you are going to offset against a forces pension a CETV's value will probably be as much worth as a chocolate fire guard in the desert.

active8,
Take your point in your second paragraph, it just goes to show how complicated things can become and most of us whos normal financial dealing are fairly simple it is a minefield (excuse the term).
Makes me wonder when the law was changed to allow pension sharing/splitting was this sort of thing looked at or was the simplistic percentage thing all that was thought about,and wouldn't it be great if there was a rule for it so we all knew where we stood.