Divorce asset split: value of house versus value of pension pot?

SabNys

My daughter is discussing the asset-split for a divorce settlement, including husband's pension pot.

I believe that the following values are indisputable:

- Current house valuation = £698,000
- Outstanding mortgage = $440,000
- Husband's pension pot = £250,000
- Husband plans to retire in 18 years.

The following assumptions are my own:

- Current fire-sale value of house = £698,000 - $440,000 = £248,000

- Therefore, current value of house ~= current value of pension pot.

My daughter wants to keep the house, and allow the husband to keep his full current pension pot (rather than half due to 50-50 asset split).

Question: Is that a fair deal for the HUSBAND? In other words, is he likely to accept? (We just want to know all the pitfalls and possible objections in advance.)

Background info: Husband is known to be good at his job, and is unlikely to have unemployment problems - or any problems that would impact his future earnings capacity.

My daughter says that his pension pot will appreciate faster than the house - and therefore he has a good incentive to accept the deal. Here's an example from Aug 2019:

https://www.telegraph.co.uk/investing/buy-to-let/pension-vs-property-would-have-left-83k-better-off-since-2005/

Albermarle

Current fire-sale value of house = £698,000 - $440,000 = £248,000

Sorry to nitpick but £698 K minus £440K ( Pounds not dollars I presume ) is £258K

My daughter says that his pension pot will appreciate faster than the house -

Nobody can know that without being clairvoyant. There are too many unknown factors in the future that could affect house prices and investments both positively and negatively.

In terms of splitting assets it is at least a simple solution , which could speed up the process and reduce legal fees that will come from extended wrangling .

Linton

698-440=258!

I do not think the fire-sale value of the house should be used. The daughter could sell the house immediately she owns it and get the full value. What is the current market value as determined by a qualified surveyor or reputable EA?

GunJack

...also, you can't live in a pension scheme nor access it before 55 (in most cases). This would make, IMHO, equating the current values of house & pension to not be fair & equitable.

If the daughter is going to keep the house, does she have enough income to sustain the mortgage? If not, it may be fairer to sell the house and split BOTH house equity and pension pot, therefore not disadvantaging either party.

Albermarle

This would make, IMHO, equating the current values of house & pension to not be fair & equitable.

My limited ( not personal) experience of these matters has shown that they are rarely fair and equitable and it depends a lot on the actual circumstances and often people will agree to things just to get it over with.

Notepad_Phil

Is this a Defined Contribution pension or Defined Benefit?

If Defined Contribution then a lot will depend on the husband's attitude to investments and risk. If he's fairly risk averse then he might want to have the safety of cash from the house rather than the longer term benefits of the pension fund.

oldernonethewiser

Albermarle wrote: »

My limited ( not personal) experience of these matters has shown that they are rarely fair and equitable and it depends a lot on the actual circumstances and often people will agree to things just to get it over with.

Agree - "fair" doesn't really come into it. The two parties need to find something that is acceptable to them both. Compromises will be made and at some point someone will say "this is not fair" and they will be correct.


Life is like that.

princeofpounds

No, it's not a fair deal.

The pension pot is still taxable, when withdrawn. Exactly what rate depends on how much is built up in the pot over time and how it is withdrawn, but even so, it's unlikely whoever keeps it will get to keep all the value that's currently in there. So if I was evaluating this on purely economic terms, you'd have to discount the value for some expected future tax rate.

Furthermore you shouldn't be comparing some forecast of price appreciation of the house with price appreciation of the pension pot. There are a few reasons for this, but the one is that what people choose to do with the assets they receive is up to them, within practical limitations. So the reply would be - well, if you think the stocks will appreciate faster, then sell the house and go buy some if you like. Another reason is that there is a large return to housing that does not come from price appreciation, but from not having to pay rent (that's called 'convenience yield' in financial jargon - the benefit you get from actually using the asset that doesn't appear as a cash inflow). I could go on with other reasons more related to your daughter's assumptions about future returns, but you really should focus on current values, not future ones (and before you object, the tax issue I mention above is a different category, as it's inevitable).

Now, I'm not specialist in divorces, so maybe these things are up for negotiation in some way, and maybe they don't apply strict financial analysis to assumptions of value. But on purely economic terms this isn't likely to quite be a fair deal. If you adjust for the tax issue on the pension, then it's much more likely to be acceptable.

Are there children involved here? That can complicate things further. I'm assuming not for now.

Also, can your daughter actually assume the mortgage on the house? 440k is a decent-sized mortgage, does she have earnings of ~100k p.a.?

swindiff

princeofpounds wrote: »

Also, can your daughter actually assume the mortgage on the house? 440k is a decent-sized mortgage, does she have earnings of ~100k p.a.?

If she did you would think she also had a pension pot of her own which would need to be factored into the calculations.

Malthusian

princeofpounds wrote: »

(that's called 'convenience yield' in financial jargon - the benefit you get from actually using the asset that doesn't appear as a cash inflow).

That's generally called "imputed rent" rather than "convenience yield". As I understand it convenience yield refers to the extra return you obtain from holding a physical asset rather than a futures contract, which is a different concept to imputed rent, unless there's some metaphorical use I'm missing.

To answer the OP's question, if I was the husband I would take the deal.

Posters are correct that £250,000 of pension is worth less than £248,000 of net house proceeds because the latter is already-taxed money and the former isn't. The reason I would take the deal is because trying to wangle some of the house proceeds to compensate me for future tax is highly likely to involve more mental energy and legal costs than it is worth.

Only 75% of the pension is taxable and some of the rest could be extracted without paying tax by retiring early enough, using State Pension deferral, etc.

Woby_Tide

Divorce is complex and needs more information. If children are involved will be even more complicated.

But on the basis of what you said being 18 years away from retirement (he can draw a pot at 55 but that may not be the 18 years). He is still some way from retirement i.e. 10years plus most likely, so the pension would be discounted in some way. Also he still needs somewhere to live and real equity to put a deposit down. With a house worth £700k it also depends what both of them need to be "adequately housed"

On the face of it though his solicitor will be saying not to accept such a deal as it's leveraged against him on the very basic details we have. What does your daughters solicitor say?