Pensions Offsetting is a popular choice for couples looking to settle divorce finances, but it’s a complex area to navigate. We look at the challenges.
What does ‘Pensions Offsetting’ mean?
The first question is, what is Pensions Offsetting? Simply, can you offset other assets against money held in a pension fund when settling your divorce case? In short, yes you can. But – and it’s a massive but – it can be a very complex decision because you are usually comparing apples and pears unless both parties are members of an identical scheme.
However, despite the complexity, Pensions Offsetting is very popular with clients and has some advantages.
What are the benefits?
An example advantage would be if the two big assets are in pensions and a home.
When one of the couple wants to keep the property, the only way this may be possible is by giving up some or all of their rights over the other’s pension – and this can be a desirable outcome. But it can also be irrational and unfair, so it’s critical that people understand what they may be giving up or losing by doing that.
Why is Pensions Offsetting so complex?
Where an expert has to compare one pension or another, it is relatively easy, but where you are comparing very different forms of assets, this can be a lot more difficult. Further, the various experts in the field have no single agreed formula for doing so. This results in very different results depending on who you ask!
Even straightforward information can be difficult to interpret. A recent report from the Nuffield Foundation gave an example of a husband and wife who had £300,000 each in their pensions. The wife’s scheme was a defined benefit scheme (one where there is a formula based on final salary) and the husband had a defined contribution scheme (where it is based on the money contributed).
In this example, the wife’s scheme on retirement paid £12,800 per annum, plus a lump sum of £38,400 and a widower’s pension of £6,400 per annum. Under the husband’s scheme, he would receive either £7,800 per annum with no lump sum or a pension of £6,809 per annum with a lump sum of £38,400.
These are very different outcomes and this simple example shows the requirement to fully understand the exact type of pension involved and its benefits. This can usually only be fully understood by the use of Actuaries, so if you are offsetting a pension in a divorce settlement, what should you do?
What steps do you need to take?
Firstly, you need to use specialist lawyers who understand pensions because they can often be one of the most significant assets in a case.
Secondly, you need to get a proper and complete valuation of the pensions involved, together with its benefits, including sorting out any necessary adjustments for tax. Only then can you consider utility and properly understand whether offsetting is an appropriate possibility.
It is because of the problems outlined above that lawyers tend to prefer to deal with types of assets separately, i.e. the non-pension assets on the one hand, and the pension assets on the other, so that you avoid comparing apples and pears as I have talked about above. We have a highly experienced team who fully understand what is involved in this complex area and are always happy to assist.
If you would like to speak to a member of our Family team about Pensions Offsetting, please get in touch with us below.