When couples reach a financial settlement following divorce, there are a number of ways in which assets can be divided. One option is offsetting, which can be particularly relevant where one person has a significantly larger pension than the other.
Offsetting involves one spouse retaining their pension while the other receives a greater share of another asset, such as the family home or savings. Rather than sharing the pension itself, its value is taken into account when agreeing the overall financial settlement.
What are the advantages of offsetting?
One of the main advantages of offsetting is that it can provide a relatively straightforward solution. Instead of transferring part of a pension through a pension sharing order, each person retains their existing pension arrangements.
For some couples, this can provide greater certainty and a clean break. One person may want to retain their pension because they have particular retirement plans, while the other may prefer to receive a larger share of the available capital or property.
Offsetting can also avoid the need to divide a pension, which may be attractive where both parties are keen to keep their financial arrangements separate following divorce.
What are the disadvantages?
The main difficulty with offsetting is that pensions are not necessarily equivalent in value to cash or property. A pension fund cannot simply be treated as being worth the same amount as a savings account containing the same figure. Tax treatment, investment performance, retirement age and the benefits available from the pension can all affect its value.
There is also a risk that the person giving up a claim to a pension may be left without sufficient provision for retirement. This needs particular consideration where there is a substantial difference between the parties’ pension provision.
Offsetting can also be complicated where the main capital asset is the family home. Giving one party a greater share of the property to compensate for pension rights may have implications for both parties’ future housing needs and financial security.
How can mediation help?
Mediation can provide a constructive environment in which separating couples can discuss offsetting alongside their other financial issues. At Hampshire Mediation, the aim is to help couples identify their priorities, understand the available options and work towards an agreement that takes their circumstances and future needs into account.
Mediation does not provide either party with independent financial advice, and specialist pension advice may sometimes be appropriate. However, it can help couples have informed discussions about how pensions, property, savings and other assets might be divided.
Offsetting can therefore be an effective option in some divorces, but it should not be adopted simply because it appears to be the easiest solution. The wider financial settlement, including both parties’ present circumstances and future needs, should always be considered carefully.