Police pensions and divorce
With the divorce courts looking to create equality between separating spouses, we have to consider pensions – often a major asset to be divided.
When a court orders that an individual’s pension must be shared, the former spouse is allocated a percentage of the member’s benefits. This is known as a Pension Sharing Order.
The calculation of an individual’s pension is known as the ‘Cash Equivalent’ (or CE). However, calculating a police pension scheme in this way can significantly underestimate the benefits due. This is because the calculations assume that the member left the police service on that day.
We look at the factors that might create inequality when splitting pension benefits between a serving police officer and their spouse following divorce.
How are police pension payments calculated?
If you leave the force before you’ve completed 25 years of service, you’ll receive your retirement benefits at 60. But if you leave having completed 30 years service, you’ll be able to retire on a full pension.
However, if the CE (Cash Equivalent) is calculated whilst you’re in active service but before you complete 25 years of service, the calculations won’t take into account up to 12 years’ worth of pension payments.
As a result, you may need to instruct an actuary to prepare a report that calculates what percentage split is required. Failure to do so may result in inequality when implementing the Pension Sharing Order, as demonstrated below.
PC Jones joined the force at 18 and is now 42. He earns £30,000 per annum and is in the process of divorcing Mrs Jones, who is two years younger than him. The Police Pension Scheme calculates the value of his pension at £160,000.
Mrs Jones doesn’t have a pension and is seeking a PSO (Pension Sharing Order). If a PSO for 50% of PC Jones’ pension benefits is granted, Mrs Jones will receive approx. £8,000 per annum when she reaches 60.
On the other hand, PC Jones can retire in six years with 30 years service and an income from his pension rights accrued before the divorce.
This would provide £12,000 per annum (75% of accrued pension), plus the income from his pension rights accrued after divorce of £4,000 per annum, giving PC Jones a total income of £16,000 per annum. This would be payable for 14 years before Mrs Jones was entitled to receive anything.
Using an actuary would ensure that a 98% percentage split of PC Jones’ pension resulted in equality. PC Jones could retire at 48; he’d have a pension income of half his pension rights accrued before divorce (£8,000 per annum), plus all the pension rights accrued after divorce (£4,000 per annum).
This will provide both PC Jones and Mrs Jones with £12,000 per annum.