Pension offsetting and how it works

Pension offsetting is a strategy used in divorce and dissolution settlements in the UK. Pensions can be a highly complex asset to divide when your relationship ends; one of the options open to you is to use pension offsetting.

It involves offsetting the value of one spouse's pension rights against other assets, such as property or savings, to achieve a fair financial settlement during divorce.

When couples are divorcing or dissolving a civil partnership, pension offsetting is one of three main options. The value of any pension is offset against other assets of a similar value, providing a financial clean break between the parties.

With pension offsetting, pensions are treated as single assets. During divorce, all assets of both parties are taken into account.

Once the pension value is established, it can be offset against other assets owned by one or both spouses. For example, if one spouse has a significant pension pot, the other spouse might receive a larger share of different assets, such as property or savings, to compensate for the value of the pension.

To use pension offsetting effectively in divorce proceedings, it is first necessary to accurately determine the total value of all shared assets and add these to the total matrimonial pot. This must include all pension and non-pension assets.

Calculating the values of respective pension schemes within a relationship can be a very complex process, and any errors in valuing a pension during offsetting can lead to undervaluation. In some cases, divorcing couples fail to consider pensions as part of the overall financial settlement, which can result in losing out on one of the most valuable assets within the relationship.

Sometimes, it may be necessary to consult an expert pension actuary to ascertain the actual capital values of all pension funds. Pension assets are not always held in the same types of schemes and funds, which means their actual values can vary significantly.

Pension providers are able to produce cash equivalent values for pensions, but the method of calculation varies from fund to fund. An expert pension actuary will be able to determine more accurate values of each pension fund.

Pension offsetting can be a complex process, and several factors need to be considered, including future financial needs, any tax implications of transferring pension benefits or other assets, and financial security to ensure both spouses achieve a fair and reasonable settlement to provide long-term financial security, including during retirement.

Seeking advice from experienced solicitors, divorce mediators, or financial advisors who specialise in pension offsetting can be hugely beneficial in ensuring a fair outcome.

The full details of the pension offsetting arrangement are required in the final divorce settlement. Once a court has approved this in a solicitor-managed consent order, it becomes permanent and legally binding.

Advantages of pension offsetting

Pension offsetting orders help the need for assets to be shared in the future and are unaffected by remarriage or death.

With overseas pension assets, it may be the best choice as they cannot be shared via a uk court order.

Disadvantages of pension offsetting

Suppose the pension is the most significant asset. In that case, pension offsetting may not be the most straightforward way to divide assets fairly, and it may be challenging to find alternative assets of equivalent value.

Additionally, if one divorcing party has no pension, which is often the case for the wife, although they may receive other assets of equivalent value in the short term, they could be left with little or no provision for their retirement.

Using a pension provider's cash equivalent value for a pension fund valuation may not accurately reflect the actual value of the total pension benefits, particularly for defined benefit pension schemes.

Pension sharing orders

Other options for pension offsetting include pension sharing orders, where one spouse's pension benefits are divided and transferred to the other spouse's pension scheme. This is a court order that sets out the details of the agreed-upon arrangement.

Pension-sharing orders can only be granted by the family court and require both parties to seek legal representation from a specialised divorce solicitor to file the necessary paperwork on their behalf and to advocate for their best interests during court proceedings. A financial advisor (independent or restricted) would then be employed to transfer the pension-sharing order. 

It can be quite complex to implement a pension-sharing order as well be expensive, which is one of the main reasons many couples offset their pension against assets of a similar value, as it helps make the process faster and less confusing.

Another alternative option is a pension attachment or earmarking order, where one spouse is entitled to a portion of the other spouse's pension benefits upon their eventual payment. Again, the courts grant these orders during the divorce proceedings in court.

This option does not provide a clean break, as an ongoing link with the ex-spouse or civil partner remains, and the couple may be required to communicate for many years after the divorce or dissolution, which is often not ideal or practical.

Additionally, pension payments will not be made until the primary pension holder begins accessing their pension funds, allowing them to control when and how the pension is used at retirement.

Get expert financial advice.

In general, pension offsetting and pension-sharing orders can be an effective way to achieve a fair financial settlement in divorce proceedings, particularly when one spouse has significant pension assets.

Once you have a sharing order in place, Let Regulated Advice match you with a financial advisor for expert advice.