How to Offset Pension Claims on Divorce?
Pension claims on divorce are always a tricky issue because pensions are not the same as any other kind of asset. This is because a pension cannot be fully accessed straight away, whereas all other assets usually can. One way of dealing with them is to split the pension in two (called ‘pension sharing’). However, this kind of solution has never been very popular since it was introduced over 15 years ago, partly because the person with the pension tends to have an emotional attachment to it, partly because the person without the pension wants cash (or another asset) instead of the pension, and partly because to achieve a fair split you need a report from a financial expert, which normally costs £1500-£3000 in extra fees. So most people resolve the pension issue by ‘offsetting’ the value of the pension against other assets in the matrimonial ‘pot’.
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Comparing the Values of Pensions
However, this leads to another problem: How do you compare the value of a pension against the value of another asset? Until now, the way this was done in most cases was to take the cash equivalent value (‘CEV’) of the pension and then lop off a bit (non-scientific i know!) to reflect the fact that it could not be fully accessed straight away. This approach has a number of difficulties, partly because a CEV can underplay the true value of the pension (particularly with final salary schemes) and partly because the ‘lopping off’ figure is not scientific.
A change of approach is in the case of WS v WS [2015] EWHC 3941 (Fam) 11 December 2015. In this case, the ‘offsetting’ involved was actually between two different kinds of pension; a money purchase scheme held by the husband, and a much larger final salary scheme held by the wife. The other wrinkle was that the husband and wife were already retired. However, I think the principle could apply to offsetting between a pension and any other kind of asset. Instead of using the pension CEV, the court looked at the projected future income from the larger pension (always a more reliable indicator of the true value of the pension), worked out what part of that the husband should have, fed that figure into a ‘Duxbury’ calculation (the calculation usually used by family courts to capitalise spousal maintenance payments) and the resulting capital figure was the value of the cash payment to the husband to offset his claim against the wife’s pension.
How Do Pensions Claims Work?
Applying this guidance to a ‘real world’ example:
- Husband and wife are both 50 years old. Matrimonial home with equity of £500k. Husband has pension with a CEV of £500k and projected future income at age 60 of £20k p.a. Wife has no pension. Husband wants to keep his pension and wife wants more equity in the house to ‘offset’ the pension. Before any offsetting, wife would otherwise be walking away with £250k from the house.
- Wife’s fair share of the projected pension income is £10k p.a. from age 60.
- Duxbury calculation says that the capital payment which would produce an income of £10k p.a. from age 60 is £160k.
- Discount applied for accelerated payment of the £160k (under a pension sharing order wife’s share of pension would only start to be paid in 10 years). This is still going to be an arbitrary figure. Say 25% = £40k
- So the offset figure for the pension is £120k and the wife therefore takes £370k from the house, and the husband takes £130k from the house and keeps his pension.
It is going to be interesting to see whether pension liberalisation changes the courts’ views of pension offsetting any further. We previously had an indication that the courts will treat pensions more like bank accounts from SJ v RA [2014] EWHC 4054 (Fam) but this is an over-simplification, given the tax consequences of unlimited withdrawals from a pension, but the case of WS v WS demonstrates more enlightened thinking.
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