If you get divorced whilst your pension is in payment what option would best suit your situation?
On retirement police officers have the option of taking a tax free lump sum worth up to 25 per cent of the cash equivalent value (CEV) of their pension, known as the commutation, the remainder is then paid out on a monthly basis and is taxed as income. However should you get divorced whilst your pension is in payment there are generally two options available to you – off-setting or a Pension Sharing Order.
Off-setting means that your former spouse would receive other marital capital in lieu of their claim against your pension income. After retirement the off-set would purely be the income element of your pension because you will have either already had your lump sum paid to you, or you may have chosen not to take a commutation and instead, take an increased level of income.
In order to successfully off-set a claim against your pension income, there will need to be sufficient other capital with which to compensate your former spouse. If the commutation was used to clear marital debt, or the commutation has been spent, then unless you have sufficient other assets, such as a share in the equity in a home, there is unlikely to be sufficient capital with which to off-set your spouse’s claim.
The key question is how much capital is required to off-set the value of your pension in payment. The first figure that you will need to obtain is the Cash Equivalent Value (CEV). The pension administrators will charge a fee for this.
The figure for the CEV should not be looked at as “pound for pound” the same as cash in the bank, because it relates to total income estimated to be paid throughout a retiree’s lifetime. Any capital given to your former spouse in lieu of a claim against your pension would need to be reduced, as your former spouse would benefit from what is known as accelerated receipt. This means your former spouse would be receiving capital now, in lieu of income paid over a long period of time.
It is not a case of simply obtaining the CEV of your pension, dividing it by two then giving your former spouse a sum equal to 50 per cent of your CEV. The amount by which the lump sum to your former spouse is reduced will vary depending on several criteria, including but not limited to the age of your former spouse and the length of the marriage. Off-setting has the distinct advantage of leaving your pension income intact, however, it will invariably mean that you will receive significantly less capital now and in some cases you may find you receive no capital at all if you decide to go with this option.
If you require capital immediately to re-house yourself, then off-setting may not be the best option for you, it depends on how much other capital is available in your “matrimonial pot”.
Pension Sharing Order
A pension sharing order means the CEV of your pension fund is debited and a pension is set up within the police pension scheme for your former spouse. Your former spouse will not be able to transfer their part of the pension out of the scheme, nor will they be able to contribute to it. Your pension will pay out to your former spouse upon their 60th birthday, regardless of the fact that you have already retired.
As your pension will be in payment, the effect on your pension income of a share being implemented will be immediate. This means that even though your former spouse may not be in receipt of their pension (because they are yet to turn 60) your pension income will reduce immediately.
A deferred pension share avoids this scenario and would mean that the pension sharing order would only be implemented upon your former spouse’s 60th birthday. A word of warning, deferred pension sharing orders are controversial and some pension administrators as well as judges refuse to allow them. Furthermore, the government have talked about closing this particular loop-hole. Deferred Pension Sharing Orders are extremely complex and consequently more expensive in terms of professional fees.
No two situations are the same and you should have a lawyer who understands the complexities of police pensions and how different circumstances might affect the outcome.