Public sector and military pensions in divorce

If you or your spouse works in the public sector or armed forces, your divorce involves a pension that requires special attention. Public sector and military pensions are almost always defined benefit pensions, and they have several features that make them particularly valuable and particularly complex to deal with in divorce.

If you treat a public sector pension like any other pension, you risk agreeing to a financial settlement that's fundamentally unfair and that will leave one party significantly worse off in retirement.

This article explains what makes public sector and military pensions different, why they require specialist advice, and what you need to know to ensure they're dealt with properly in your divorce.

What are public sector pensions?

Public sector pensions are the pension schemes available to people who work in the public sector. The main public sector pension schemes in the UK are:

• The NHS Pension Scheme for NHS workers including doctors, nurses, healthcare professionals, and administrative staff working for the NHS.
• The Teachers' Pension Scheme for teachers in state-maintained schools and some other educational settings.
• The Civil Service Pension Scheme for civil servants working in government departments and agencies.
• The Police Pension Scheme for police officers.
• The Firefighters' Pension Scheme for firefighters.
• The Local Government Pension Scheme for people working in local government, including council employees and some related organisations.
• The Armed Forces Pension Scheme for members of the armed forces, which we'll discuss separately later in this article.

If your spouse works or has worked in any of these roles, they almost certainly have a public sector pension.

Why are public sector pensions valuable?

Public sector pensions are almost always defined benefit pensions, which means they promise to pay a specific income in retirement based on your salary and length of service. This is fundamentally different from defined contribution pensions where you build up a pot of money but don't know what income it will provide.

Public sector defined benefit pensions are generally more valuable than private sector pensions or defined contribution pensions for several reasons.

When you retire with a public sector pension, you know exactly what income you'll receive every year for the rest of your life. There's no uncertainty about investment performance or annuity rates. The income is guaranteed.

This guarantee is backed by the government or by well-funded public sector employers. Unlike some private-sector defined benefit schemes that have run into financial difficulties, public-sector schemes are effectively guaranteed. You can rely on the pension being paid.

Most public sector pensions increase annually with inflation or a fixed percentage. This means your pension income keeps pace with the cost of living throughout your retirement.

Over a 30-year retirement, the cumulative effect of these increases is enormous. A pension that pays £20,000 in year one and increases with inflation might be paying £35,000 or £40,000 by year 30. This inflation protection is extremely valuable and is one reason why public sector pensions are worth more than their Cash Equivalent Transfer Value might suggest.

Many public sector pensions automatically provide spouses' pensions. This means if the pension scheme member dies, their spouse continues to receive a percentage of the pension (often 50% or more) for the rest of their life.

This is a valuable benefit that provides financial security for the surviving spouse. It's also a benefit that isn't always fully captured in the CETV calculation.

Some public sector employees can retire earlier than the normal State Pension age. For example, police officers and firefighters often have lower normal pension ages, reflecting the physically demanding nature of their work.

Being able to retire earlier and start receiving pension income sooner makes the pension more valuable. You receive the income for more years of your life.

The formulas used to calculate public sector pensions are typically more generous than those in private sector schemes. Many public sector schemes provide 1/60th or even 1/49th of salary for each year of service, which builds up substantial pensions over a career.

Someone who works in the public sector for 30 or 40 years can easily build up a pension worth several hundred thousand pounds or more.

Cash Equivalent Transfer Values

When a public sector defined benefit pension is valued for divorce purposes, the pension scheme provides a Cash Equivalent Transfer Value. As we explained in our article on pension valuations, this is the lump sum that the scheme considers equivalent to the promise of future pension income.

For public sector pensions, there's a significant problem. The CETV often substantially undervalues the pension, particularly for younger members of the scheme. This creates a serious risk of unfair settlements if you simply accept the CETV at face value.

CETVs can undervalue the pension

The way CETVs are calculated for public sector pensions often doesn't reflect the true value of the benefits for several reasons.

The calculations are based on assumptions that may be conservative. For example, they might assume shorter life expectancy than you'll actually have, or lower inflation than will actually occur. Conservative assumptions produce lower CETVs.

The valuable features of public sector pensions, such as guaranteed inflation-linked increases and generous survivor benefits, may not be fully captured in the CETV calculation. These features are difficult to value precisely, and the methodology used for CETVs may not give them their full weight.

For younger members, the CETV has to make assumptions about what will happen over many years before retirement. These long-term projections tend to produce conservative figures that don't reflect what the pension will actually be worth.

The effect of being able to retire earlier than normal retirement age may not be fully reflected in the CETV.

Undervaluation issues

The undervaluation can be substantial. It's not unusual for a public sector pension to have a CETV of £300,000 but to provide retirement income that would require a pot of £500,000 or more to replicate in a defined contribution pension.

If you agree to a 50/50 split based on the CETV of £300,000, you might receive £150,000 transferred into a defined contribution pension while your spouse keeps a reduced public sector pension. In retirement, your £150,000 might provide £6,000 to £7,000 per year, while your spouse's reduced public sector pension provides £18,000 or £20,000 per year.

On paper, you each got half. In reality, your spouse has pension income that's three times larger than yours. The settlement was not fair, but by the time you realise this, it's too late to change it.

NHS pensions

NHS pensions are among the most common public sector pensions encountered in divorce. If your spouse works or has worked for the NHS in any capacity, they're likely to have an NHS pension.

The NHS Pension Scheme is a defined benefit scheme that provides pension based on career average earnings (for the current scheme) or final salary (for older sections of the scheme). The benefits are generous and include automatic spouse's pensions and death benefits.

NHS workers often build up substantial pensions, particularly if they've had long careers in the NHS. A senior nurse, doctor, or other healthcare professional who has worked for 30 or 40 years might have a pension valued at several hundred thousand pounds.

The CETVs for NHS pensions are particularly prone to undervaluing the true worth of the benefits, especially for younger NHS workers. If you're divorcing someone with an NHS pension, getting expert advice from a Pension on Divorce Expert is strongly recommended.

Teachers' pensions

The Teachers' Pension Scheme is another large and generous public sector scheme. Teachers in state-maintained schools in England and Wales are automatically members of this scheme.

Like the NHS scheme, the Teachers' Pension Scheme is a defined benefit scheme with generous benefits. Teachers who have taught for their entire career can build up very substantial pensions.

The same issues with CETV undervaluation apply to teachers' pensions as to other public sector pensions. A teacher's pension with a CETV of £250,000 might provide retirement income that would cost significantly more to replicate through a defined contribution pension.

Civil service pensions

Civil servants working in government departments and agencies are members of the Civil Service Pension Scheme. There are different sections of the scheme depending on when someone joined, but all provide defined benefit pensions.

Civil service pensions can be particularly valuable for people who have had long careers in the civil service, especially in more senior positions. The pensions include inflation-linked increases and survivor benefits.

The CETV issues that affect other public sector pensions apply equally to civil service pensions. Expert valuation advice is important when these pensions are involved in divorce.

Police and firefighter pensions

Police officers and firefighters have their own pension schemes with some special features. These schemes typically allow earlier retirement than other public sector schemes, reflecting the physically demanding and potentially dangerous nature of the work.

Police officers can often retire with full pension benefits in their 50s. Firefighters have similar provisions. This ability to retire early and start receiving pension income sooner makes these pensions particularly valuable.

The CETVs for police and firefighter pensions may not fully reflect the value of being able to retire early. If you're divorcing a police officer or firefighter, this is something a Pension On Divorce Expert can help assess.

Local government pensions

The Local Government Pension Scheme covers employees of local authorities and some related organisations. It's a large scheme with many members, and it provides defined benefit pensions based on career average earnings.

Local government pensions have features similar to other public sector pensions – guaranteed income, inflation-linked increases, and survivor benefits. They're generally valuable pensions, and the same CETV undervaluation issues can apply.

Military pensions

Armed Forces pensions deserve special attention because they have some unique features that make them particularly complex to deal with in divorce.

Service personnel can often retire in their 40s or early 50s and start receiving a pension immediately. Someone who joined the armed forces at 18 might retire at 40 with 22 years of service and a pension that starts immediately, providing income for 40 or 50 years.

This early access to pension income makes military pensions particularly valuable. The CETV may not fully capture this value.

There are different armed forces pension schemes depending on when someone joined (the Armed Forces Pension Scheme 1975, the Armed Forces Pension Scheme 2005, the Armed Forces Pension Scheme 2015). Each has different rules and benefits.

Understanding which scheme applies and what benefits it provides requires specialist knowledge. Your standard solicitor might not be familiar with the complexities of military pensions, which is why specialist advice is important.

Military pensions can have two elements. There's an immediate pension that's paid as soon as you leave the armed forces (if you've served long enough), and there's a preserved pension that's paid when you reach State Pension age.

These two elements need to be valued separately and dealt with appropriately in the divorce settlement. It's possible to make serious errors if you're not aware of this two-tier structure.

Military pensions can include various additional benefits beyond the basic pension. There might be additional payments related to service overseas, specialist roles, or other factors.

All of these elements need to be properly identified and valued. It's easy to miss valuable components of a military pension if you're not familiar with how they work.

Military pensions are genuinely complex. If your spouse has a military pension, you should instruct a Pension on Divorce Expert who specialises in military pensions. The complexity and value of these pensions justify the cost of this advice.

Trying to deal with a military pension without proper expert advice is a significant risk. The chances of missing important elements or agreeing to an unfair settlement are high.

If your divorce involves a public sector or military pension, follow these steps to protect your interests.

Don't accept the CETV at face value

The most important guidance here is not simply accept that the CETV represents the pension's fair value. For public sector and military pensions, it almost certainly doesn't.

If your spouse (or their solicitor) proposes a settlement based on a 50/50 split of CETVs, question whether this is genuinely fair. The CETV might be substantially undervaluing your spouse's public sector pension.

Instruct a Pension On Divorce Expert

For public-sector and military pensions, particularly when the values are substantial, you need expert advice. A PODE who specialises in these pensions can assess whether the CETV is fair, calculate what income the pension will actually provide in retirement, and advise on what settlement would genuinely be fair.

The cost of this advice will be far less than the cost of agreeing to an unfair settlement that leaves you thousands of pounds per year worse off throughout your retirement.

The benefit statement

In addition to the CETV, obtain the benefit statement showing the annual income the pension will provide at retirement. Compare this income with the CETV. If the pension pays £25,000 per year but has a CETV of only £200,000, this suggests the CETV is not capturing the full value.

A PODE can help you determine whether the relationship between the CETV and the expected income is reasonable or indicates undervaluation.

If your spouse is young (in their 30s or 40s) and has a public sector pension, the CETV is particularly likely to undervalue it. There are many years of contributions and growth ahead, and the conservative assumptions used in CETV calculations may not reflect the ultimate value.

Conversely, if your spouse is close to retirement, the CETV is more likely to be a reasonable reflection of value because there's less uncertainty about future events.

What will you receive in retirement?

Don't just look at the numbers on paper. Think about what your retirement will actually look like. If you receive a pension share, what income will it provide? How does that compare with what your spouse will receive from their remaining pension?

A PODE can model this for you, showing what the retirement incomes of both parties would be under different settlement scenarios. This practical approach is far more illuminating than just looking at CETVs.

Public sector and military pensions are complex. Getting proper valuations and expert advice takes time. Don't let yourself be pressured into agreeing to a quick settlement based on inadequate information.

The stakes are too high. Your financial security for 30 or 40 years of retirement is at risk. Taking the extra time to get proper advice is absolutely worth it.

When pension offsetting is particularly risky

Be especially cautious about pension offsetting when public sector or military pensions are involved. The temptation to accept a larger share of the house instead of a share of your spouse's public sector pension can be strong, particularly if you need somewhere to live.

However, public sector pensions provide a guaranteed income for life with inflation protection. This is fundamentally different from owning property. If you accept an offset based on the CETV, and the CETV is substantially undervaluing the pension, you're giving up far more than you're receiving.

For example, accepting the house worth £300,000 while your spouse keeps an NHS pension with a CETV of £300,000 might seem fair. But if that pension will provide £20,000 per year for life, you've given up guaranteed income that could be worth £600,000 or more over a 30-year retirement. The house doesn't provide income. You'll own a valuable property but struggle to afford to live in it.

If you're considering pension offsetting with a public sector or military pension, you absolutely must get expert financial advice about the long-term implications before agreeing to anything.

Getting it wrong

The financial consequences of incorrectly valuing a public sector or military pension in divorce can be devastating. If you agree to a settlement based on a CETV that substantially undervalues your spouse's pension, you'll be locked into that unfair settlement for the rest of your life.

Twenty or thirty years from now, when you're both retired, and it becomes painfully clear that your spouse has double or triple your pension income, there's nothing you can do about it. Pension Sharing Orders cannot be varied once implemented. You cannot go back to court and say, "I didn't understand" or "the valuation was wrong."

This is why getting proper expert advice at the time of divorce is not optional. It's essential. The cost of the advice is trivial compared to the cost of getting it wrong.