What is pension offsetting?

Pension Offsetting in Divorce

To achieve a fair division of assets during a divorce, it is not uncommon for one person to keep one asset as a trade off for another.

One person may take full ownership of the family home, for example, while the other receives cash in the bank, investments and other assets of equivalent value. This form of ‘offsetting’ can be a more practical solution than selling every asset and dividing up the proceeds, particularly when there are emotional ties to certain assets and housing needs to consider.

Pension offsetting is a specific type of offsetting. It involves one person retaining all or most of their pension benefits in exchange for giving up other assets to their former spouse.

What is pension offsetting?

If you and your former spouse opt for a pension offsetting arrangement, each party keeps their own pension assets. These are then offset against the other matrimonial assets. For instance, if one person has a larger pension pot, then the other might get the house or other financial assets, such as stocks or bonds, assuming they are of equivalent value.

It is important to note that pension offsetting does not mean an equal split of assets. The value of each asset will be assessed and a fair division agreed upon between both parties as part of the overall financial settlement in a divorce.

What are the advantages of pension offsetting?

The main advantage of pension offsetting is that it keeps things simple. Pensions stay in the hands of each individual, so there’s no need to worry about changing pension providers or dividing one pension into two.

It effectively provides a clean break between the parties in terms of their future pension benefits which many couples find attractive.

Other advantages of pension offsetting include:

• Practicality: If the family has small children, for example, it may be more beneficial for one parent to keep the family home rather than having to sell and potentially uproot the children. Pension offsetting allows for this.
• Not affected by a change in circumstances: Pension offsetting is not affected by death, remarriage or other changes in circumstances. Once the offsetting agreement is made and asset ownership transferred, the deal is done and cannot be undone.
• Cost-effective for smaller pension pots: Other options for splitting pension benefits, like pension sharing, can be prohibitively expensive for smaller pension pots, making pension offsetting a more affordable option.
• A good option for overseas pension assets: Local laws and pension scheme rules often prevent the splitting or sharing of foreign pensions, which may leave one spouse in a financially vulnerable situation. Pension offsetting can be a more effective way of ensuring that both parties have their long-term financial needs met.

What are the drawbacks of pension offsetting?

The major disadvantage is that pension benefits cannot be treated the same way as cash in the bank. Pension funds are a future benefit, and what you receive in retirement depends on the type of pension fund, contribution levels, when funds are accessed, and market fluctuations.

This makes it very difficult to ascertain the ‘true’ value of a fund.

Caution must be taken before you agree to one of you keeping their pension in lieu of other assets. It is recommended that you get the expert opinion of a pension actuary. They can put a pound-figure on the amount of pension assets that need to be offset against other capital assets to achieve a fair split.

Other disadvantages include:

• May leave one spouse without a pension: If the other divorcing party has no pension, although they will receive assets of the equivalent value, they might be left with no provision for their retirement. Depending on their age, health and financial situation, this could have long-term consequences.
• May leave one spouse with minimal liquid assets:  If one party offsets their pension, they may not have sufficient liquid assets to rehouse and they may need to take out a larger mortgage.
• Pension offsetting is typically a one-off arrangement. It does not take into account any future changes in circumstances or pension benefits, so one person may end up losing out in the long run.
• May not be feasible. Where the value of the pension represents a party’s most valuable asset, there may be no alternative assets of equivalent value to offset.

What is the process for pension offsetting?

The starting point for any pension sharing arrangement is to work out the value of the matrimonial pot. Adding the value of pension assets and non-pension assets together gives you the total value that needs to be divided between the parties.

The next step is working out the capital values of the pension funds. You can do this in one of two ways:

• By requesting a cash equivalent transfer value (CETV) from the pension provider; or
• By seeking a professional valuation from an actuary.

The CETV is an estimate of how much your pension pot would be worth if you transferred it out into a different scheme or cashed it in. Each fund has a different way of calculating CETV. While this figure is easy to obtain, it may not represent the true value of the pension fund when all the benefits are taken into account.

For all but the smallest pension pots, it is generally recommended to seek professional advice from a pension actuary instead.

Once the value of the pension fund is established, the actuary can consider how much of another asset is appropriate to offset its value. Bear in mind that these are not like-for-like comparisons. The actuary will consider factors such as the tax that will be paid when the pension benefits are drawn before making their recommendations.

The specifics of the pension offsetting arrangement can then be written into a Consent Order, which is a legal document that outlines the division of assets and any other agreements made between the parties. Once approved by the court, it will be permanent and legally binding.

If you and your ex-partner are unable to agree on the details, then the Court will decide the best way to divide your finances, including your pensions, in Financial Remedy proceedings.

How is pension offsetting different from pension sharing?

Pension sharing is the most common way to divide pensions during a divorce. It involves one partner giving up a portion of their pension to the other party in the form of a ‘pension credit.’ The receiving spouse can then transfer the pension credit into their own pension fund so they have full control over it.

Although pension sharing and pension offsetting both result in a clean break between divorcing parties, pension sharing involves a transfer of pension benefits, where pension offsetting involves a transfer of other assets of roughly equivalent value.

Which one is better for you depends on various factors such as the type of pension, its value, and your long-term financial needs.

• Read our blog post: Divorce in your 60s – The Financial Implications

Can pension offsetting be used for foreign pensions?

Pension offsetting can be used to balance out the division of foreign pension assets in a divorce and, in fact, is sometimes the only way to achieve a fair split of pension benefits that originate overseas.

An overseas pension will always be governed by the laws of the country in which it was earned. Some jurisdictions have clear rules about who is entitled to benefits in the event of a divorce, while others may prevent the sharing or transfer of a pension altogether. These rules are bypassed with pension offsetting, since the pension itself does not change.

Dealing with overseas pensions can be more complex than dealing with UK-based pensions. It is advisable to seek professional advice from a pension actuary who specialises in international pensions before making any decisions, as well as a law firm, like Osbornes, that specialises in international divorce.

We can commission pension actuarial reports on your behalf and help to explore the options available in relation to foreign pensions, including drawing up suitable agreements or representing you at court.

• Read our blog post: Do You Have to Divorce in the Country Where You Married?
• Read our blog post: 8 Considerations for French Nationals Divorcing in England & Wales

How our solicitors can help

Pensions are among the more complex assets in the matrimonial pot, and each fund is unique. Our expert divorce lawyers and high-net-worth divorce lawyers are experienced in financial settlements and will be able to identify the right arrangements for your specific situation, including where assets are held overseas.

Pension offsetting is only one option. Our friendly solicitors can help you consider the pros and cons of pension offsetting against other options such as pension sharing or pension attachment (earmarking). Whatever option you choose, you can rest assured that we will negotiate on your behalf to get the best outcome for you and represent you in court if necessary.

To speak with one of our solicitors, contact us by:

• Filling in our online enquiry form; or
• Calling us on 020 7485 8811