Pension off-setting is one of the options available upon divorce whereby one of the parties trades a right to a share of a pension for another matrimonial asset. It provides a clean-break as assets of the same or similar value are allocated to one spouse in lieu of a pension sharing order.
The main problem is valuing the pension(s). The starting point for the court is the CETV (cash transfer value) as the value of the pension(s). This is the capitalised value of the pension rights. Valuations make it difficult to agree a fair off-set.
There are two types of pensions;
· Defined contribution- This is defined by the contributions made into the fund and the value equals those contributions. These include private pensions including SIPPs.
· Defined benefit- These are defined by the benefit received upon retirement. These are typically final salary pension schemes e.g. Teachers, NHS and local government.
The key feature is how much the monthly payment will be on retirement calculated by the salary earned and the years worked. Valuing defined contribution and defined benefit schemes is not straight forward. The defined benefit calculation can be 20% more than its CETV value. It is therefore essential that before parties consider off-setting pension against capital that they obtain valuations from an actuary.
The main benefits of an off-set;
· It is simple and there is no implementation by the pension provider.
· One party may need a home or other capital assets.
· One party may die before retirement and it might be preferable to receive a benefit now in the form of a capital asset.
· The pension provision is very small and the costs of a pension sharing order would be disproportionate.
· The solution may suit the needs of the parties when both are financially successful and both have their own substantial pension provision.
· Off-setting is not affected by death.
· Overseas pensions- these cannot be the subject of a pension sharing order made by an English Court.
The drawbacks of an off-set;
· One party may be left with little or no ongoing benefit. If one party takes the house but no pension entitlement this could cause problems in the future.
· Depending on their proximity to retirement, this could be quite disadvantageous to the parties, it may not fully take into account the tax situation i.e. the pension benefits will most likely be paid minus tax on 75% of the funds.
· Depending on the value of the assets, it might be difficult to determine an accurate and fair division of the assets.
Off-setting is arguably the simplest method of dealing with pension benefits on divorce. However, off-setting orders should be treated with caution and solicitors have to advise clients of the importance of obtaining expert evidence with regard to the pensions.
If you would like to find out more information about the issues raised above, please contact Susan Taylor. 0161 883 0460 or email firstname.lastname@example.org