How does pension offsetting work?

Background to Divorce and Pensions

When a a married couple divorces or a civil partnership is dissolved, any assets that are owned jointly and those individually owned must be factored in as part of the divorce process. Pensions held by either party are no exception Pensions could be a considerably prized asset. Some of the people hold the opinion that “A pension is his/her savings and nothing to do with me.” Nevertheless inside Divorce law this is not the case. Divorce law makes provision for pensions to be equalised between husband and wife or civil partners.

There are a bunch of vital steps that must be completed to reach this stage. In the first instance, up to date or latest valuations of each parties pensions must be acquired from the current pension schemes or companies. This is normally completed during the beginning stages of the divorce and pensions negotiations. This can give both parties a total view of the combined potential retirement earnings. It will then have to be decided how much, if any, of the pensions must be transferred to each party. This can be done by negotiation between the parties, or the Courts could have decide if it can not be agreed by negotiation. The Court may want to locate an expert in the event of more technical cases, for instance, where there are defined benefit type pensions

Once this has occurred and the other key parts of the divorce have been agreed, this could be submitted to the Court for approval. This document is known as a Consent Order. The Court will then produce instructions to the applicable pension companies or schemes called a Pension Sharing Order. This is a formal instruction to the pension scheme to share the person’s pension with their former better half or civil partner.

There are several ways this can be achieved in practice. Each has it’s own benefits and risks, benefits and disadvantages. One increasingly more common method is called pension offsetting.

An example may be handy to show how this could work in practice. Partner 1 has a pension worth £100,000 and Partner 2 has a property valued at £100,000. The partners agreed to keep their own assets rather than applying to the Court to receive a share of each other’s asset. This means that they have reached a negotiated financial settlement without the requirement to transfer assets between one another which can in turn attract costs.

Divorce and Pensions and taking an early pension are both key topics covered by My UK Pension Plan, an online source of pension information.

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