Pension offsetting: dealing with pensions upon divorce

Pensions are often the largest asset, after the matrimonial home, within financial proceedings upon divorce. Dealing with pensions on divorce is a complex subject, and it is important that it is understood by all parties.

Pension offsetting

Pension offsetting is where the right to receive a pension (now or in the future) is traded for current capital. For example, one party keeping their pension, whilst the other party keeps the matrimonial home. This can help to solve capital problems like a need or desire to retain a property or pension where there is little other capital to assist.

Such division may seem like a quick and simple solution at first glance, but comparing the values of such different assets can be difficult and the results achieved could potentially be unfair if not considered properly.

For example, £50,000 of pension to start being paid out in 20 years’ time is not worth the same as £50,000 of physical property now. It is usually the case that there will be some discount given for the advantages of ‘accelerated receipt’, where you receive and benefit from the money or capital now rather than later.

It is important to take this on a case by case basis. In some circumstances, retaining the family home may be worth more to you than the equivalent paper value of a pension which you cannot access for a number of years. But it is also important to think ahead and prepare for retirement, where possible, so that you have sufficient income at that time.

There are a huge number of factors and perspectives to consider, and it is important to think about your future needs as well as those existing now. For this reason, expert input is required to ensure that all parties involved fully understand what they are losing, retaining or acquiring.

Pensions Advisory Group Report [2019]

The Pensions Advisory Group advises that, where possible, each asset class should be dealt with separately so that offsetting is avoided. They also note however that this may not always be possible, and that in some circumstances offsetting may in fact be the most appropriate solution. It is fact dependant.

W v H [2020]

Pensions upon divorce was considered in the recent case of W v H, where HHJ Hess noted that “that mixing categories of assets runs the risk of unfairness in that valuation issues become very difficult, and, absent agreement, it may be unfair anyway to burden one party with non-realisable assets while the other party has access to realisable assets”.

This further emphasises the complexities of this subject, and the need to obtain expert valuation.

How can we help?

For more information regarding financial proceedings upon divorce, including pensions as assets, contact a member of the Family Law Team at Blake Morgan.

This article has been co-written by Abbie Coleman and Simon Burge.