The surprising pros and cons of pension offsetting for divorcing couples

Your pension could be one of your most valuable assets. Find out how to use "pension offsetting" to share your pension assets during a divorce

We recently shared an article about the benefits of obtaining a Pension Sharing Order (PSO) to divide pensionable assets as part of your divorce settlement.

Pension offsetting is another option you might want to consider when divorcing or dissolving a civil partnership. Offsetting allows you or your ex-spouse or civil partner to retain the full value of one party’s pension, in exchange for another asset of similar value.

While you might be focused on resolving short-term financial arrangements (such as who will live in your shared home) during your divorce, protecting your long-term financial security is just as important for you and any dependants you may have.

Indeed, pension offsetting could help you make clear retirement plans while giving both you and your ex-spouse or partner a clean financial break – often an appealing prospect during a separation. However, there are significant downsides to consider too, so it’s crucial to seek advice before you agree to an offsetting arrangement.

Read on to learn more about pension offsetting and discover the pros and cons of this approach, to help you decide if it’s the right choice for you.

How pension offsetting works

Unlike a PSO which splits pension assets between a divorcing couple, pension offsetting means that one person normally retains their full pension while the other receives an asset of similar value. In this way, the value of any retirement savings is “offset” against other assets.

The first step towards pension offsetting is to calculate the total value of all your shared assets, including any pensions you each have.

Unfortunately, getting an accurate valuation of certain assets can be complicated, especially if their value is likely to fluctuate over time, as is typically the case with pensions.

What’s more, if you have a defined benefit (DB) or “final salary” pension, you’ll usually need to request a “cash equivalent transfer value” (CETV) from your pension provider. This is the amount your current provider will offer you if you decide to transfer your pension to another scheme.

So, as you can see, accurately valuing a pension without a Pensions on Divorce Expert (PODE) report can be complex so you may need to obtain professional advice (more on this later).

Once all assets have been valued by the appropriate experts, one party can opt to keep their pension and offset this against other assets of a similar value. For example, if your ex-spouse or partner has a large pension pot, you might agree to give up your right to a future claim on their pension in exchange for keeping your shared home.

The pros and cons of pension offsetting

As with PSOs and earmarking – the other options for dividing pension assets during divorce – there are both pros and cons to pension offsetting.

Pros of pension offsetting

• Offsetting provides a clean break as there is usually no need for ongoing contact or future sharing of assets.
• Pension offsetting provides clarity and certainty as it is not affected by a change in circumstances, such as remarriage or death.
• You don’t need a court order to offset a pension, so choosing this option could save you time, expense, and stress during your divorce.
• Pension offsetting could be a more cost-effective option than alternatives, depending on the size of the pensions involved.
• Offsetting can be used with overseas pension assets, whereas a UK PSO cannot.

Cons of pension offsetting

• While one party might benefit from receiving assets – such as a property – in the short-term, they could miss out on a valuable retirement income in the future.
• Valuing pensions and other assets can be complex, as they may fluctuate in value over time. As a result, it can be difficult to ensure that assets are divided fairly using offsetting.
• If there are substantial pension assets at stake, pension offsetting may not be the most straightforward way to divide assets.
• If you take an asset in exchange for a share of the pension assets, you could lose the protection of any life insurance benefit (and other protective measures) that come with that pension.

Of course, the relative pros and cons of pension offsetting will depend on your individual circumstances and goals.

So, it’s well worth speaking to a financial planner who can provide support and guidance tailored to your specific needs.

The importance of seeking financial advice

Whichever type of pension scheme you and your ex-spouse or partner belong to, seeking financial advice is crucial for understanding their true transfer value. Relying solely on a CETV could lead to an inaccurate valuation of pension assets and an unfair offsetting agreement.

If the CETV for your DB pension exceeds £30,000, you must, by law, seek advice from a regulated financial planner before transferring any funds. A financial planner can refer you to an actuary or a PODE with the necessary expertise to accurately value your pension assets.

Additionally, if you’re a divorcing woman, seeking professional advice could be especially important for ensuring a fair pension sharing agreement.

Indeed, divorce can play a major part in exacerbating pension inequality between men and women.

This may be due in part to the fact that women often forego their claim on a spouse or civil partner’s pension in favour of remaining in the family home. While such an agreement may provide short-term comfort and stability, it could also jeopardise their financial security in later life.

If you’re feeling overwhelmed by the process of pension sharing during your divorce, I can help you explore your options and find a path that’s right for you.

As an experienced financial planner who specialises in supporting divorcing clients, I can obtain accurate valuations of your marital assets, from savings and investments to pensions. Indeed, establishing an accurate valuation of all your shared assets is an essential foundation for pension offsetting and any other financial negotiations.

If you’d like to find out more about how we can work together, please get in touch by email lottie@truefinancialdesign.co.uk or call 07824 554288.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. 

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.  

Workplace pensions are regulated by The Pension Regulator.