Pension Offsetting Explained
Offsetting is arguably the simplest and cleanest method of dealing with pension benefits on divorce. In this scenario, the court will start from a consideration of all of the couple’s assets, that is, including the value of all non‑pension and pension assets and any income being received, before deciding how to divide the couple’s matrimonial estate.
Once the values have been established, the value of the pension rights can then be weighed/offset against other matrimonial assets, such as the family home or other savings. In essence, the ex‑spouse/former civil partner gets another asset, or share of another asset (up to the appropriate value of the share of the pension) instead of a share of the pension.
As an example:
The court has decided to split all of a couple’s assets 50/50. The husband has a pension through his work but his wife does not. The pension fund is worth £150,000 and the couple’s home is worth £300,000. The court decides that the husband can keep his pension arrangement in his own right but his wife is then entitled to £225,000 of the house proceeds.
This method was initially used as the courts were unable to compel the pension holder to set aside any of their pension benefit for their ex‑spouse/former civil partner.
The main benefits of this approach are:
- It keeps the resulting transactions relatively simple along with a cleaner break
- Depending on the circumstances, the solution may be better suited to meet the couple’s individual circumstances, especially when both parties are financially successful and each has substantial pension provision
- One party may have a need for the use of other assets (for example, a home)
- If one party is likely to die before retirement, it may be preferable to receive a benefit now by way of other assets
- If the pension is small, making a pension sharing order will likely be expensive/disproportionate
- Offsetting orders are unaffected by remarriage or death
The main drawbacks with this approach are:
- One of the parties may be left with little or no provision for retirement. Depending on their proximity to retirement this could be quite disadvantageous for them
- It may also not fully account for the tax situation of the respective assets, that is, the pension benefits taken will most likely be paid minus tax on 75% of the funds
The suitability of various options for pensions on divorce will depend on the particular circumstances of each individual. Different options may have different effects for tax purposes, different implications for pension provision and different impacts on other assets and financial planning, as well as different legal impacts on the distribution of assets on divorce.
This page provides information and is only intended to provide an overview of the current law in this area as at December 2019 and does not constitute financial advice, tax advice or legal advice, or provide any recommendations. This is a complicated area, and individuals going through a divorce should take tailored, appropriate advice about their financial settlement on divorce and future tax and financial planning.
Tax limits, allowances and rules are often subject to change and may change in future. Individuals should check that tax limits, allowances and rules have not changed.