New Decision In Offsetting Pensions

Recent case law has provided a considered overview of offsetting pensions in financial remedy orders. This is an area of family law where there is little guidance and a diversity of views.

Offsetting pensions in financial remedy orders

Case law

The recent case in question involved a husband with a defined contribution pension held in a self-invested personal pension, as well as a small money purchase pension plan.

He had already taken the 25% tax free element, leaving funds worth approximately £970,000. In light of the recent pension reforms, he was able to take the remainder of his pension funds as cash, subject to tax.

By contrast, the wife had a pension from her employment which was a defined benefits scheme based on her final salary. She had also taken the 25% tax free lump sum and the remainder of the pension was in payment providing her with a gross annual income of £92,000.

Cash equivalent values of the pensions were obtained.  A pension sharing order was not an option in this case, as such an order would take the husband well over the lifetime allowances with severe taxation consequences.  The agreed approach was an offsetting lump sum.  The issue in dispute was the level of that lump sum.

As the wife’s pension was a defined benefits scheme, regardless of the cash equivalent value, the pension could never be equivalent to or converted to cash in her hands.  In this case it was considered that comparing the pensions of the husband and wife was like comparing apples and pears.  The wife could only take income which ceases upon her death.  By contrast the husband could withdraw his funds in full whenever he chose, subject to the payment of tax.

No expert’s report was available to the court to assist in carrying out the appropriate calculations. Four fundamental points were considered:

1. In this case the court was not concerned with needs as each parties’ needs were met before pension provision was taken into account.
2. The case did not involve comparing like with like. One party was being required to pay a large sum of money to reflect the other party’s loss in not receiving a future share of a pension in payment.
3. Any methodology was based upon factors and assumptions which almost certainly would not in fact arise as may be predicted.
4. This case required capitalisation of future income requirements.

This case has offered a little clarity in an area where there has previously been little guidance.  However there still remains a diversity of views and each case is specific upon its own facts.