Armed Forces pensions are among some of the most complex pensions that practitioners can be faced with when dealing with divorce and financial settlements. Their complexity arises not only from the myriad of scheme types, but also the differing aspects of each scheme including accrual rates, the ages that the pension is put into payment, and whether the payments being made can be considered pension or not.

This guide to some of the issues is written for practitioners to consider when faced with such pensions.

Schemes

There are three or four schemes that practitioners may come across regularly. These schemes do not represent the totality of the schemes in existence, and some of the niche schemes include the Royal Gibraltar Regiment schemes and the Ghurka schemes, which have additional legislative complexity overlaid.

Practitioners are likely to deal with a number of legacy schemes. These schemes are all now closed to new entrants and benefits cannot be built up in these schemes. Specifically, these closed schemes are AFPS 1975, AFPS 2005, and the RFPS (Reserve Scheme). Benefits in these schemes are still available to members, and these schemes remain shareable.

Terminology

Part of the mystique with these pensions is the impenetrable language used when dealing with them. These pensions are put into ‘payment’ they are not ‘drawn down’, but benefits can be ‘drawn’. That seems like semantics, but to ‘draw down’ infers that a pot of actual money exists whilst in reality for AFPS schemes they are un-funded, and any ‘pot’ is purely notional. There is nothing therefore to ‘draw down’.

Table 1 covers some of the very necessary basics.

Table 1: Definition of terms

Broad principles

All AFPS schemes are non-contributory, meaning no contributions to pensions appear anywhere on the scheme member’s pay statements. No reference to pension is even mentioned on military pay statements. All schemes are unfunded, meaning they are paid to members from general monthly taxation receipts. There is no pot of money invested on any stock market that pays for these pensions.

Certain pensions cannot be shared on divorce including War Disablement pensions. An already shared AFPS pension can be shared again in a future divorce, whether that is the pension credit member or pension debit member’s benefits.

Resettlement grants may be payable to those who have completed service before the immediate pension point in AFPS 75. Officers (‘commissioned’) need 9 years’ service and other ranks (‘non-commissioned’) require 12 years’ service to be eligible. The other two schemes pay resettlement grants where eligibility to EDP has not been met for all ranks if 12 years of service have been completed.

A resettlement grant is not a pension payment, but of course practitioners can take it into account as a capital payment. If a member goes on to qualify for an immediate pension or EDP, the resettlement grant is not paid.

None of these schemes allow any pension share to be moved out of the scheme and into any other pension arrangement by the pension credit member.

All schemes can pay pension to members from the age of 55, but the pension payments are reduced in amount as they will be in payment for longer. Deferred AFPS 75 pensions cannot be paid any earlier than the age of 60.

Principal scheme characteristics

Table 2 sets out the main differences between the schemes.

Table 2: Comparison of schemes

Practical considerations

Here are a few practical considerations that practitioners ought to ensure they have a good understanding of to allow us to deal with these assets fairly.

If the pension debit member is not in receipt of pension income or EDP, then the pension credit member can generate their own lump sum when they claim their pensions at the deferred pension age.

Watch out for younger AFPS 75 members (an AFPS 75/EDP recipient could be aged just 40 years old) and an unusually depressed pension income figure caused by commutation, where the member has sacrificed pension income for a bigger lump sum. This was hugely common to do among scheme members who often had a greater need for capital on leaving, than for income. Don’t forget, there are good tax reasons for reducing income too. Remember that the commutation pension depression in AFPS 75 falls away from the member’s 55th birthday, resulting in an uplift of the pension payment as if commutation never took place. Beware of poverty pleading in these situations! Ask for confirmation that commutation was taken.

Fifty-five is a magic age in AFPS. AFPS 75 scheme immediate pension benefits, and 05 and 15 EDPs are all paid at a flat rate from the point at which they start being paid until the magic age of 55. From age 55, AFPS 75 payments and EDP are uplifted by the sum of CPI backdated to the date the pension and EDP were first paid, and from here on, increased annually by CPI. Where CPI has been high over time, this can result in significant uprating of these payments.

At age 55, the EDP in the 05 scheme increases to be paid at a rate of 75% of deferred pension value, and increases annually by CPI in the same way as above. For practitioners, this means that the value of in payment scheme benefits increases annually if the member is aged over 55, and old CETVs should really be updated if they are over 12 months old.

EDP is an income stream, not a pension payment and cannot be shared. It is prudent to be very specific about the value these payments have to the member, especially as the pension credit member can never benefit from these payments themselves (unless they have served and have their own!). The value of EDP can be huge over the time that they could be paid, and may require a significant adjustment on separation to fairly compensate the party not receiving them.

Closing thoughts

As the legacy schemes are phased out, the role that EDP will play and the importance of dealing fairly with EDP will become acute. Practitioners should get familiar with what EDPs are, and are not, how they arise, and when they are paid. All things equal, if there are no further changes to Armed Forces pensions for years to come, EDP could be in payment from the age of 40 until the current state pension age; a period of 28 years. I predict that practitioners will need to be able to understand the value this will present particularly in divorces of younger forces personnel (aged in their 40s) where the potential for future EDP value to outstrip the equity available in property could cause problems when there is insufficient to offset with, or no property available at all. This may preclude a clean break if the solution is to make periodical payments in lieu of a capital lump sum when it isn’t available. Options clearly exist to give one party a larger share of the pension to compensate for EDPs in payment, meaning the party with EDP has a larger income up to pension age, whereafter the non-EDP party has a greater share of income in retirement.

These pensions represent a unique challenge to the practitioner and require careful handling so as not to prejudice either party when dealing with them on divorce. They have features unseen in any other pension system (EDPs are unique to Armed Forces pensions), and nuances that require a depth of understanding that is difficult to achieve without regularly interacting with them. Seek specialist actuary advice per the Pension Advisory Group report, A Guide to the Treatment of Pensions on Divorce (PAG, 2nd edn, 2024) (see Appendix I), and bear in mind the issues I raise above.