Offsetting - You can live on a pension but not in one!


                                                                                                  Prior to 1997 offsetting the pension value against other assets was the

                                                                                                  only way that a pension could be taken into account. This seemingly

                                                                                                  simple method isn't’t quite so straightforward when thought about.

                                                                                                  Typically the pension in relation to other assets is thought of as a quid

                                                                                                  pro quo, so one keeps the pension and the other assets go to the ex,

                                                                                                  so that should be easy, if the house is worth £300,000, and the

                                                                                                  pension also £300,000, he keeps the pension and she keeps the

                                                                                                  house, it’s simple, but is it fair?  


                                                                                                  The disadvantage for the ex wife’s is that although she has a house,

                                                                                                  which she can sell whenever she wants she has no pension.  


                                                                                                  The disadvantage for him is more immediate, nowhere to live and no

                                                                                                  money to buy somewhere with, in credit crunched Britain of today he

                                                                                                  might have trouble borrowing as well. He may well think that the in

                                                                                                  offsetting he was disadvantaged in receiving the pension because he

                                                                                                  can’t have any of it, he can’t raise money against it either, and when

                                                                                                  he does retire, many years from now he will pay tax on it, the partner

                                                                                                  who received the house is free to sell at any time, with no tax to pay,

                                                                                                  or borrow against it or, of course live in it..  


                                                                                                  The old adage says a bird in the hand is worth two in the bush applies

                                                                                                  here. The pension has a value but what value is put on an asset that is

                                                                                                  inaccessible now and will be taxed when it is eventually paid? If it’s a

                                                                                                  defined benefit scheme then what value is used, the CETV? Why?  

                                                                                                  This is an argument that needs to be settled and fairly.  


                                                                                                  Earmarking - your pension share can vanish, before your very eyes!                                                                                                                 

                                                                                                  So rare not even worth mentioning, I’ll leave the last words to those I

                                                                                                  heard from a Judge who when earmarking was mentioned said

                                                                                                 “Move on, no interest”, succinct and very clear indeed.  


                                                                                                  Splitting, is this the answer?  


                                                                                                  It probably is, it certainly answers the nightmares that earmarking

                                                                                                  brought up and does largely work, it does leave each partner with a

                                                                                                  (albeit reduced) pension and it does give each a fair share of the other

                                                                                                  assets, all that however assumes that the split is fair and that’s where

                                                                                                  it becomes a nightmare, one chance, one opportunity, and only one

                                                                                                  chance to get it right.  


                                                                                                  Pensions split into two types, defined contribution (money purchase)

                                                                                                  and defined benefit (60th schemes, like the NHS and civil service).  


                                                                                                  Money purchase is on the face of it simple, a pot of money, it gets

                                                                                                  added to and invested and when you retire you buy a pension with it.

                                                                                                  So obviously the pension fund, which we have here on our yearly

                                                                                                  statement, is simply split in two, right? Well it could be but it’s not likely

                                                                                                  to be fair, although women now in theory retire at the same age as

                                                                                                  men women still live longer, which means they need more money to

                                                                                                  buy the same pension as a man of the same age. How much more

                                                                                                  depends on their ages and the difference in their ages and needs to

                                                                                                  be individually calculated for each case.    


                                                                                                  Defined benefit schemes are very complex, the promise is of a future

                                                                                                  benefit which will be calculated on as yet unknown details such as

                                                                                                  salary when you retire, some have multiple possible retirement ages

                                                                                                  and some extra benefits which although always paid are not actually

                                                                                                  contractually so.  


                                                                                                  Defined benefit schemes are split by giving the receiver a percentage

                                                                                                  of the transfer value who will then receive this as a pension credit,

                                                                                                  they may have the option of joining that scheme or may not, if they do

                                                                                                  not then they will normally transfer or be transferred to a money

                                                                                                  purchase arrangement.


                                                                                                  Splitting normally strives to achieve an equalisation of the pension

                                                                                                  incomes, the income that the party keeping the scheme will receive

                                                                                                  and the income that the party receiving the share will receive from the

                                                                                                  scheme that the share will go to. This is not easy, it’s very complicated

                                                                                                  but it is the only fair way to achieve parity because simply splitting the

                                                                                                  transfer value will almost never achieve the desired result because the

                                                                                                  transfer value, or to use it’s real name the cash equivalent transfer

                                                                                                  value (CETV) seldom, if ever, represents the true value of the scheme.  


                                                                                                  Five reasons why the CETV might not be a fair value of the pension

                                                                                                  so is of no little or no use as a value in either offsetting or splitting for



                                                                                                  The CETV is designed to value the liability of the scheme to the

                                                                                                  employer; it was never designed for anything else and was never

                                                                                                  intended to be used for anything else. If the CETV was equal to the

                                                                                                  true value of the scheme then there would have been no pension mis

                                                                                                  selling scandal, but there was.  


                                                                                                  Schemes often have optional early retirement pensions and many,

                                                                                                  such as the armed services and police allow retirement on very

                                                                                                  generous terms at age 50, however the CETV is calculated assuming

                                                                                                  retirement at age 60, the CETV therefore massively undervalues the



                                                                                                  The CETV assumes that the member has left service and calculates

                                                                                                  accordingly, the value can be radically different if membership is

                                                                                                  considered to be continuous.  


                                                                                                  The scheme itself may be underfunded and therefore reduces the

                                                                                                  CETV accordingly; the CETV given is a transfer value that the scheme

                                                                                                  has to guarantee to the member so this is fair. However if the member

                                                                                                  hasn’t and doesn’t intend to leave service then this does not apply,

                                                                                                  an underfunded scheme will have agreed with the employer a plan to

                                                                                                  reduce the shortfall over time during which the CETV will, of course be



                                                                                                  It is very common for a lot of schemes to pay discretionary non

                                                                                                  contractual benefits, normally in the form of increasing pensions in

                                                                                                  payment and many have done so for years, for them this is in fact the

                                                                                                  norm. However the CETV can ignore these discretionary benefits and

                                                                                                  often does because by lowering the schemes liability this can make

                                                                                                  the company accounts look better.


                                                                                                  More details can be found in the corporate and technical brochure here.


Pension Splitting for Divorce 4 Horton Drive Middleton Cheney Banbury Oxfordshire OX17 2LP - Tel 07952 902444

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