How to Offset Pension Claims on Divorce?

Pension divorce claims are always tricky because pensions are not the same as other assets: a pension cannot normally be accessed straight away, whereas other assets usually can. Pensions also often come with complicated pension scheme rules.

A divorce pension solicitor can help you understand the option of pension offsetting and help you achieve a fair financial settlement.

Contact Evolve Family Law for specialist divorce legal advice.

Pension sharing or offsetting

There are two main ways to share the value of pensions in divorce financial claims:

1. Pension sharing, or
2. Pension offsetting.

With a pension share, you get a share of your spouse’s pension, ranging from 1 to 100% of the pension fund. The shared pension then becomes your pension fund, and any further contributions to the fund after the pension-sharing order is implemented belong to you as the owner of the pension fund.

Many spouses don’t want to share their pension because they feel that either they or their employer contributed to the retirement fund, and it is their money. Their spouse may not want to share a pension with a pension sharing order because they want more cash or equity from the family home to buy a new property.

Whether you are looking at pension sharing or offsetting, it is vital to get all your pension and your spouse’s pension funds correctly valued before you negotiate a financial settlement.

 Comparing pension values

Most people receive an annual cash equivalent value of their pension, which shows its value if they want to transfer it to a different pension fund.

People assume that two pensions, each with a cash equivalent value (CEV) of £250,000, are of equal value. While the figure may be the same, the two pension funds may produce two very different levels of pension income in retirement. That may be because one fund is an NHS, local government, or defined-benefit scheme, while the other is a personal pension scheme invested in cash or yielding low-risk returns.

As you cannot compare the real value of pension funds by comparing CEVs, your divorce solicitor should consider getting advice from a pension actuary to make sure that one CEV is not underplaying the true value of the final salary pension fund or overvaluing a pension fund where the fund is in deficit.

The importance of accurately valuing pension funds

Spending money getting an asset valued when you may be many years away from retirement may seem wasteful and a daft idea. However, if you both agree to keep your pension funds at their identical CEVs of £250,000, one of you may be able to retire with a pension of £18,000 per year, and the other with £9,000 per year. With most financial court orders, you cannot ask the court to even out pension income injustice when you reach retirement age. That’s why it is so important to accurately value pensions before you reach a financial settlement.

Duxbury calculations and pension values for offsetting

Instead of using the pension CEV to value a couple’s pension funds, the family court can value each fund based on projected future income. This is a more reliable indicator of the pension’s true value. Once the income values have been ascertained, the court can undertake a Duxbury calculation.

A Duxbury calculation is usually used by the family court when determining the lump sum required to capitalise spousal maintenance payments. This means the amount a financially weaker spouse needs as a capital or lump-sum payment to compensate them for not receiving ongoing monthly spousal maintenance payments. Adopting the same principles and Duxbury methodology, a pension offset amount can be calculated to help reach a financial settlement.

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An example of pension offsetting

Here is an example of how pension offsetting can work in solicitor negotiations, family mediation or when a family law judge decides what financial court order to make after the final hearing of a financial remedy application:

• A husband and wife are both 50 years old. They jointly own a family home with equity of £500,000. The husband has a pension with a CEV of £500,000. The husband’s pension is projected to provide £20,000 a year at age 60. The wife has no pension provision.
• The husband wants to keep his pension, and the wife wants more than 50% of the equity in the house to offset the value of her husband’s pension. Without pension offsetting, the wife would be walking away with £250,000 from the house sale proceeds.
• The wife’s fair share of the projected pension income is £10,000 a year from age 60.
• A Duxbury calculation says that the capital payment which would produce an income of £10,000 a year from age 60 is £160,000.
• A discount may be applied for an accelerated payment of the £160,000 because, with a pension sharing order, the wife’s share of her husband’s pension would only start to be paid in ten years. Applying a 25% discount reduces £160,000 to £120,000.
• This results in a pension offset figure of £120,000, and the wife therefore gets £370,000 from the house sale proceeds, and the husband gets around £130,000 from the house and keeps his pension.
• The order for the sale of the family home and the division of the equity would usually be expressed as percentages to avoid the husband or wife losing out if house prices increase or decrease. Under the figures, the wife would receive 74% of the net proceeds from the sale of the family home, and her husband would receive the balance and keep his pension.

In any contested financial remedy proceedings in which a judge decides how the assets are divided and the extent of any pension offset, there is an element of judicial discretion. For example, some judges may not discount the pension offsetting figure by 25%, and others might decide not to use the Duxbury method.

A specialist divorce finance solicitor can advise you on the likely range of pension outcomes in financial proceedings to help you come to an agreed financial settlement through solicitor negotiations, using our One Lawyer Divorce Service or family mediation, and our family lawyers can then assist you in converting your financial agreement into a binding financial consent order.

Contact Evolve Family Law for specialist divorce legal advice.+++