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Pension Options on Divorce - Offsetting

01/11/2023

Pensions and divorce

When married couples divorce or civil partnership’s dissolve, pension benefits will often form a large part of the couple’s combined assets. The divorce settlement will therefore need to take account of these assets in an appropriate way.

There are currently three ways that this can be done – Offsetting, Earmarking and Pension Sharing. In this update, we will look at Offsetting.

What is Offsetting

Offsetting is where the value of pension assets are taken into account under the divorce, but each person retains their pension rights in full. Instead, the value of the pension rights are offset against other assets - For example, the person with the smaller pension may get a larger share of the sale of the former couple’s house to compensate.

Offsetting is the most commonly used method for dealing with pension rights on divorce. It might be more suitable for cases where:

  • Both of the divorcing couple have sufficient retirement benefits in their own right to support them in retirement
  • The value of non-pension matrimonial assets is at a level that allows offsetting
  • The divorcing couple are both working and a long way from retirement, allowing time for both parties to build up their own pension rights.
  • There are overseas pension assets, which cannot be shared via a UK court order.

Comment

Offsetting is the most cost effective way to deal with a pension on divorce and requires the least involvement by the pension scheme. The divorcing parties typically will only need to obtain a Cash Equivalent Value (CEV) from the pension scheme, so as to understand how much the pension is worth.

However, Offsetting will not be appropriate for all divorces. Next time, we will look at Earmarking (Pension Attachment) orders, before considering the other option, Pension Sharing orders.

Important Information

Please note this is for general information only and is based on LV=’s understanding of the relevant legislation and regulations and may be subject to change.

The tax treatment of benefits depends on individual circumstances, and may be subject to change in the future.

The use of this document is at your own risk, and the content should not be used for the provision of professional advice.

LV= accept no liability for any damages, losses or causes of action of any nature arising from your use of this document.