Pension offsetting in divorce means one person keeps their pension and the other takes more of the house or other assets in return.
Offsetting is one of three ways to deal with a pension in a divorce settlement, alongside pension sharing and earmarking. It is common, but putting a price on a pension is harder than it looks. Trading a pension for a house? An FCA-authorised adviser takes questions like that, and ringing you back is free if you fill out this page's short form. Questions about the court order itself are for a solicitor.
What is pension offsetting in divorce?
MoneyHelper describes offsetting as keeping the full pension and letting the other partner take "other assets of similar value". The Pension Advisory Group's guide, published through the Nuffield Foundation, is more specific: offsetting "allows one party to retain their pension rights and, in lieu, the other party has a disproportionate amount of non-pension assets, e.g. property or cash, achieved by a lump sum or property adjustment order."
It is "legally defined nowhere and referred to in no statute", yet "by far the most frequently used approach to accommodate pensions in the overall settlement". In practice it is a bargain within the whole settlement, and the court has to be satisfied the result is fair. The three options side by side are in what happens to your pension on divorce.
Divorce: keep the pension or keep the house?
That is the usual shape of an offset. The guide says offsetting is often viewed as an appealing outcome "for primary carers who wish to retain the family home", who give up some or all of a claim to the pension to secure it. It lists other situations where offsetting may be the only feasible route:
- one person wants an asset, such as the home, worth more than half the non-pension assets;
- one person wants to keep their pension, perhaps being close to retirement while the other is not;
- sharing charges would be excessive given the size of the pensions;
- the pension is overseas or cannot be shared for another reason.
There is a hard limit: offsetting can only be used if there are sufficient other assets to set against the pension. It can also be mixed with sharing, which the guide calls "partial offsetting".
Why is it hard to compare a pension with cash?
The guide's central warning is that "one is invariably trying to compare two very different asset classes": a future income for life against cash or a house usable now. Three things make the sums difficult.
The valuation figure
The usual starting number is the cash equivalent transfer value (CETV); getting a pension valuation for divorce covers how to request one. For offsetting, the guide says the CETV "is often not a reliable comparator for divorce purposes and may not even be comparable between different Defined Benefit pension schemes". Where the case involves only defined contribution funds, which carry no guarantees, it says the CETV may be a good starting point.
Its worked example has one spouse with a defined benefit CETV of £750,000 and the other, in a different scheme, with £500,000. That would suggest £250,000 more in other assets for the second spouse, yet "both H and W will receive a pension of c.£20,000 p.a. from age 65". The gap came from how each scheme calculated its figure.
Tax, access and risk
The guide says the person receiving an offset "will not be subject to tax on the amount received", though invested offset money may bring its own tax issues, while pension income is taxed as it is paid. A pension often cannot be drawn straight away, whereas cash is available now. A defined contribution fund carries no guarantees; a defined benefit scheme promises an income. Whoever keeps the pension keeps those features, and whoever takes the house keeps a different set.
What do the guides say about tax and "utility" adjustments?
The guide suggests two adjustments when a pension is set against cash. The first is for tax: it says adjustments "might be between 15% and 30% depending on circumstances", depending on whether the pension holder is expected to be a basic rate or a higher rate taxpayer in retirement.
The second is "utility", a possible reduction because cash now is more useful than income later. The guide is cautious: utility adjustments "will often not be appropriate", and where justified a range of 0% to 25% might be considered, which "is a matter of judicial discretion and not for PODEs to decide". It adds that, with pension freedoms, the adjustment has arguably lost its usefulness for many defined contribution pensions, because holders who reach normal minimum pension age are often able to turn the fund into cash, subject to tax. It also says that a need for capital to meet a basic housing need would point against any utility adjustment.
These are suggested ranges for professionals, not rules, and no figure here is what your own offset would be. Pension scheme rules and your retirement plans decide how fair an offer is, so ask an adviser about both with the call-back form here.
When is a pension on divorce expert report used?
A pension on divorce expert (PODE) values pensions for a divorce. The guide says a report "is usually needed in offsetting cases because the value of rights given up is so important", though the expert's figure "is not definitive or binding". Do I need a pension on divorce expert? covers when a court looks for one, how to find one and what it costs.
Good practice, the guide adds, is to state the before-and-after income, capital and pension positions on or with Form D81, with an explanation of how the offset was reached, because the judge must be satisfied the settlement is fair.
What can go wrong with offsetting?
The guide treats it as the riskier route: negligence claims against family lawyers have overwhelmingly arisen where offsetting was chosen rather than pension sharing. Where possible it suggests dealing with each asset class on its own, evening out pensions with a sharing order and other assets with a lump sum or property order. Sharing is explained in what is a pension sharing order.
How does pension offsetting work in Scotland?
The idea is the same, but the starting point differs. Under the Family Law (Scotland) Act 1985 the proportion of pension benefits "referable to" the period of the marriage before the relevant date counts as matrimonial property, which is shared fairly "when it is shared equally or in such other proportions as are justified by special circumstances". Values are taken at the relevant date: whichever comes first of the couple ceasing to live together and service of the divorce summons, subject to exceptions in the Act. Pensions on divorce in Scotland goes through this. A Scottish solicitor can say how it applies to your case.
Unsure what your pension is really worth beside the house? Request a call from an adviser with the enquiry form here; questions of that kind are everyday work for them.
Frequently asked questions
Is pension offsetting the same as pension equalisation?
Not quite. The guide names equalisation of income and equalisation of capital as the most common approaches in both pension sharing and offsetting cases, so equalisation describes how a fair split is measured, and offsetting is one way of delivering it, by trading pension rights for other assets instead of splitting the pension.
Can offsetting be combined with pension sharing?
Yes. The guide says "partial offsetting" should not be ignored where it leads to the fairest overall settlement.
Can an overseas pension be offset?
The guide lists overseas pensions, or any that cannot be shared, as a case where offsetting may be the only feasible option. A solicitor can say how it would be valued.
Does the court have to accept the figure we agree?
Not automatically. The judge must be satisfied that the settlement is fair, which is why the guide treats it as good practice to set out the before-and-after positions and the reasoning for an offset on or with Form D81.