Pension offsetting on divorce is one of the methods by which divorcing couples or the court can allow one party to retain certain pension benefits while allowing the other to increase their share of other assets (the other common method being pension sharing). A common example of offsetting is where the wife retains all or a greater share of the former matrimonial home, thereby providing stability and continuity for her and the children, in return for giving up her interest in the husband’s pension.
Pension offsetting is an imprecise science. There is also scant guidance available and judges and actuaries often remain divided as to the best way to achieve a fair outcome. Pensions by their nature cannot be treated as equivalent to a capital. They are not “property” as they are neither transferable nor uniformly realisable. So, if a pension £1 is not the same as a capital £1 how much should it be worth?
Traditionally, there has never been a fixed calculation. Once the parties’ pension values are established (usually) by reference to the CETV (Cash Equivalent Transfer Value) a “utility discount” must then be applied to the pension value to reflect the perceived advantage of holding cash now rather than any future pension benefit. No single method has ever been adopted by the courts.
In April 2015 changes to the law allowed tax-free pension lump sums to continue to be taken while removing old restrictions in respect of annuity retention for Defined Contribution schemes (usually personal or stakeholders schemes). Greater freedom was afforded to allow drawdown from the age of 55 in certain cases. For these schemes, the pension “pot” should be more easily calculated and the nearer to drawdown the nearer a calculation based on a like for like, or £1 for £1 (less any tax) basis, ought to apply. For Defined Benefit schemes (usually workplace or final salary schemes) no such benefits or ease of calculation attach. Immediately the problems in valuing different pension schemes for offset purposes are apparent. A Defined Benefit scheme that cannot be accessed as readily as a Defined Contribution scheme ought not to be discounted in the same way.
Case law relating to the treatment of pensions is substantial, inconsistent and requires careful navigation by a solicitor with considerable knowledge and experience of this constantly changing area of law. The real skill lies in understanding the value of the pension as compared to the other assets in the case, then taking this information in conjunction with the needs and requirements of the client to achieve the best possible final settlement.
For anyone with a pension element, it is important that an experienced and specialist solicitor is on hand throughout their case to guide them through the maze of asset and pension valuation. It goes without saying that the need for such specialist advice increases in comparison to the value of the pension pot and it becomes even more essential to understand and discuss the different options available. The Beswicks team has the necessary experience and proven approach to ensure the best possible outcome for our clients.