What is pension offsetting?

When dividing assets on divorce it is not uncommon for one party to suggest that they keep one asset as a trade off for another.

For example, one party taking a larger share of the equity in the house and the other retaining the joint savings in lieu of that. This ‘offsetting’ approach is arguably more pragmatic than each asset being sold and divided between them. 

Pension offsetting is effectively an extension of this approach – i.e. one party retains all (or more of) the pension asset in lieu of another capital asset that will be retained by the other party. However, whilst this approach might be suitable for a range of capital assets, when it comes to pensions this can be a lot more problematic. This is because pension assets are very distinct to other capital assets and caution should be taken when one party suggests ‘keeping their pension’ in lieu of something else. 

From the outset, it is important to stress that pension assets cannot be treated in the same way as cash in the bank. The value of pension funds cannot therefore be easily compared to other assets on a pound for pound basis. Pension funds cannot be accessed in the same way as a bank account and it can be very difficult to understand the true ‘value’ of the fund. It is therefore really important that when considering how to deal with pensions on divorce that expert opinion is taken from a pension actuary. 

A pension actuary can, however, help to quantify what amount of pension asset is to be offset against other capital assets. This can take into account the value of the pension assets, the different types of pension funds and the impact of restrictions on that asset (e.g. when the funds can be accessed). 

How does pension offsetting work?

1. Firstly, the opinion of an expert pension actuary should be taken to ascertain the true capital values of the pension funds.  If pension assets are held in different types of funds, this can often mean that the values of those funds varies. Whilst all pension providers will be able to produce Cash Equivalent Values for the pensions, the way in which these are calculated varies from fund to fund. An expert opinion should therefore be taken in the first instance to determine accurate values of each pension fund. 
2. Once the values of the funds are understood, a pension actuary can then consider how much of another capital asset (e.g. equity in the home) would be appropriate to ‘offset’ one party retaining their pension assets. Consideration should also be given to the tax that will be paid when drawing the pension asset and also number of years it may be before that party can actually access the funds in the pension and, if required to wait for a period of time, how this might impact the offsetting amount.
3. With the benefit of the expert opinion, the parties can consider how much (and what other) of the capital assets will be retained by the other party in lieu of the pension funds. A financial order can then be made reflecting the division of assets in accordance with this offset. 

Pros & Cons

Pros

• Pension offsetting can avoid the need for implementation of a ‘pension sharing order’ to share the pension assets between the parties. 
• Pension offsetting can suit the needs of the individual parties; both those who wish to retain their pension funds intact for the future and those who would prefer access to more of the capital assets immediately.
• This might be a good option if there are overseas pension assets that need to be shared, as these cannot be shared via a UK court pension sharing order. 
• Pension offsetting could avoid the implementation fees charged by pension administrators for implementing pension sharing orders.  This might be attractive and more cost effective if the pension values are more modest. 

Cons

• The person who is retaining more pension assets may then have limited access to other capital assets that remain. This could leave them with real financial difficulties in the short and long term. 
• The non-pension holder might then be left with little or no provision for retirement.  This might mean they find it harder to meet their outgoings in the future. 
• The value of one party's pension assets might heavily outweigh the value of the other matrimonial capital assets, making offsetting impractical or unaffordable.
• Offsetting may be unfair, especially if expert actuarial advice is not obtained to calculate the appropriate amounts, and could leave one party with less than a fair share of the overall assets.