Pension offsetting on divorce: Why it’s not as simple as it looks
When you’re dividing assets in divorce, pensions are often one of the biggest and most complicated parts of the settlement. One option is pension offsetting. This means you agree that one person keeps more of the pension, while the other gets more of the house, savings, or cash now.
At first glance, this might feel straightforward. But in reality, pension offsetting is full of hidden traps.
Why offsetting is tricky
Cash vs future income – A pension isn’t the same as cash in the bank. It can’t usually be touched until retirement, and its future value depends on many assumptions (age, health, tax, investment growth)
Valuations vary – The “Cash Equivalent Value” (CEV) provided by your pension scheme looks official, but it often doesn’t reflect the true value of the pension, especially for final salary (defined benefit) schemes. Two pensions with the same CEV could provide very different incomes.
No clear rules – Unlike property valuations, there’s no single method for working out how much cash today equals pension income tomorrow. Experts often use different approaches, which can lead to very different results.
Common problems people face
Wide range of figures – In real cases, experts asked to value offsets came back with results that differed by tens or even hundreds of thousands of pounds.
“Utility discounts” – Some reports reduce the pension value further, to reflect the idea that “cash today is more useful than pension later”. Others ignore this altogether.
Tax issues – Pensions are taxable when drawn, but whether and how this is factored in can vary.
Confusion in court – Judges rarely give detailed reasoning on offsetting, which means there’s little guidance on what’s “right”.
What this means for you
If you’re considering pension offsetting, be cautious:
Don’t assume the CEV is fair value – It’s just a starting point
Think about your needs – Cash now might feel more valuable, but you could be giving up long-term financial security in retirement
Consider expert advice – Even if you’re representing yourself, it may be worth instructing a PODE (Pensions on Divorce Expert) to explain the real value
Be clear about assumptions – Ask what retirement age, tax rates, and discount rates are being used. These choices make a big difference.
The Bottom Line
Pension offsetting can look simple - one person keeps more of the house, the other keeps the pension. But the reality is far more complicated. Without proper advice and clear understanding, you risk agreeing to something unfair or irreversible.
Take time to question the figures and, where possible, seek input from a pension expert. The decisions you make today will affect your retirement for the rest of your life.