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

Malthusian

The daughter should forget she read the Telegraph article as it is garbage.

The_Torygraph wrote:

These figures do not take into account any yields you may receive from a rental property, however.

In other words it compares total return from pension investments with price return only from property, which is an invalid comparison.

It attempts to explain away this laziness by then going on about tax and maintenance costs, but rental yield after tax and costs is not nil, and CGT is optional.

There is a good chance of a pension investment outperforming buy-to-let, mainly due to tax relief, but not for the reasons the Torygraph gives.

As others have said future returns from property v pensions are irrelevant; the relevant issues are the not-yet-taxed status of the pension. And potentially, as Woby_Tide points out, whether the husband can manage without taking away any currently-liquid assets. (Personally I wouldn't see that as a problem if I had a good and secure job that supported some proportion of a £440k mortgage, but it's up to him.)

Woby_Tide wrote:

He is still some way from retirement i.e. 10years plus most likely, so the pension would be discounted in some way.

Only if it's a DB pension. If it's a DC pension the value is what it is and is not discounted. The reference to a "pot" led me to assume a DC pension. If it's a DB pension it is more complicated.

If it is a DB pension it is even more likely he should take the deal because unless the DB pension would allow the daughter to join the scheme, the DB pension would be worth more to her husband than the CETV share would be to her.

Woby_Tide

Malthusian wrote: »

Only if it's a DB pension. If it's a DC pension the value is what it is and is not discounted. The reference to a "pot" led me to assume a DC pension. If it's a DB pension it is more complicated.

If it is a DB pension it is even more likely he should take the deal because unless the DB pension would allow the daughter to join the scheme, the DB pension would be worth more to her husband than the CETV share would be to her.

Even if it's a DC pensions whilst the current CETV would be on the E1 form, in any settlement a £250k DC pension pot won't be equated to £250k of housing equity unless the pot is instantly accessible, the further away from accessible it is the more discounting may happen(it isn't a set formula as it all comes down to the relevance of the pension within the overall asset structure available for the divorce)

[Deleted User]

In other words it compares total return from pension investments with price return only from property, which is an invalid comparison.

It attempts to explain away this laziness by then going on about tax and maintenance costs, but rental yield after tax and costs is not nil, and CGT is optional.

There is a good chance of a pension investment outperforming buy-to-let, mainly due to tax relief, but not for the reasons the Torygraph gives.

That’s quite a lot of venom reserved for a simple and reasonable statement. The article goes on to tell you a possible range of income from rental properties as well as possible costs and taxes associated with it so that one can do the calcs for himself. The reason it’s done like that is made clear: massive variability in rental income depending on location. And in taxes.

Aside from that, I wouldn’t consider future returns at all. What matters is the value today. After all, the house can be sold immediately after the divorce and the proceeds could be invested.

Thrugelmir

SabNys wrote: »

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.

What other assets are there to be divided?

Humdinger1

Sab

When I divorced (8 years ago), we had to get specialist pensions advice because it is complicated. From memory, and things may have changed, cash value equated to approx 2/3 of paper value.

I understand that you want to help your daughter but I'd be astounded if anyone, inc a judge, agreed to write down the value of the house by 440k/nearly 75%, just because that's the size of the mortgage. The other side's lawyers certainly won't, in my view, and it would allow them to paint your daughter as unreasonable in court (if it gets that far, which it probably would if she held out for this); that won't help her case at all and will cost a bomb. Courts don't like attempts to disadvantage either party and they've seen it all. Of course, if children are involved their interests must come first but the needs of both adults will also be considered.

There are specialist property valuers used in these circs. This wouldn't even be your main concern, but anyone buying a house that was previously valued at approx 700k for 250k would find themselves liable for a colossal stamp duty bill based on the market value of the house. HMRC doesn't take kindly to losing out on tax.

I too wanted originally to stay in the marital home. In the end, it was a huge relief to move to a smaller place and have a proper fresh start. It allowed me to move on psychologically and I'm now in a happy marriage. I doubt that would have been possible if I'd been surrounded by reminders of my first marriage, in the former marital home.

Sorry if this sounds harsh - the first stage of all divorces that I've seen is getting to grips with the new normal. It's painful but necessary; accepting reality turned out to be the start of a new happy life for me, once I'd let go of my fantasies and desire to score points. Not saying that your daughter is doing this, but that's how it is for many. Please keep us posted and good luck Humdinger

bowlhead99

SabNys wrote: »

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.)

Thrugelmir wrote: »

What other assets are there to be divided?

Deleted_User wrote: »

Aside from that, I wouldn’t consider future returns at all. What matters is the value today. After all, the house can be sold immediately after the divorce and the proceeds could be invested.

The 'what other assets are there' is a key question, and the fact that house proceeds could be invested tax efficiently is a sensible observation.

If there are no other assets and I'm the husband, and I currently live in a £700k house with a mortgage I can service, do I want to give my share of that up to keep the pension, and then have to go back to renting with a zero deposit towards getting a roof over my head again... just to keep that £250k pension which is mostly taxable in retirement (£188k of it is taxable)?

No, I don't.

If I can service a £440k mortgage, perhaps I have a £100k salary. With £50k of income attracting higher rate tax, and some carry-forward allowance available, there is loads of higher rate tax relief available when contributing to a pension. If I sell the house and take my approx £130k half-share of the equity proceeds fromI can perhaps quite easily stuff the ~£130k into a new pension within two or three tax years, and with higher rate 40% tax relief I can create a £215-220k pension (creating a £217k pension with 40% tax relief costs £130k net).

If we split everything down the middle, I get half the existing pension (£125k) and half the property equity (£130k), and that property equity could be used by me to either create a new, smaller, roof over my head (if I think a new flat or small house is a priority over retirement planning); or to create a £217k pension on top of my share of the £125k pension, for £340k+ of pension in total (if I think retirement planning at the expense of somewhere to live is a priority).

So, if I thought having somewhere to live was a priority, I would want to keep my ownership interest in the house, and agree to sell it (in an orderly market transaction rather than a fire sale!) and use the proceeds to live on.

Or if I thought having a big pension pot was a priority, I would want to keep my ownership interest in the house, and agree to sell it (in an orderly market transaction rather than a fire sale!) and use the proceeds to fund additional pension contributions and create a much bigger pension than I currently have.

As the daughter's proposal that I just keep an extra £125k of pension and have nowhere to live, is woefully inferior to selling my half share of a house and have nowhere to live but enough proceeds to create an extra £217k of pension, there is no way I would, thinking rationally, accept her proposal of giving her my half-share of the house.

Of course, in love and divorce, people are not always thinking rationally, so there's no accounting for 'what you can get away with' if you try something on and get lucky.

GunJack

bowlhead99 wrote: »

(if I think retirement planning at the expense of somewhere to live is a priority).

.err....who in their right mind would do this in reality???

I'm sure the back seat of a (insert car type here) isn't as comfy as a bed in a small house/flat...

bowlhead99

GunJack wrote: »

.err....who in their right mind would do this in reality???

I'm sure the back seat of a (insert car type here) isn't as comfy as a bed in a small house/flat...

No, but if you have a high salary (sufficient to support a £440k mortgage) you will inevitably have some decent rental options and not therefore need to live in your car while you plan for single life ahead. You will need somewhere to live in retirement too, so can't really focus on building a retirement pot of cash to provide income later if it's to the exclusion of everything else now... but your retirement provision is important.

If you think nobody in their right mind would prioritise a pension pot over a property (or over the cash from property equity) then you probably agree with my general point that it's unrealistic to expect the husband to be willing to hand over his economic interest in the house in order to keep the second half of his pension. Even if there wasn't a huge disparity in effective values of the two assets - caused by the tax effect - which, there is!

mark5

Any pension built up before the marriage isn’t usually counted they also look at how long before the pension can be accessed when determining its current value.

What increases the pension might see in the future after divorce are irrelevant, the value on the day of financial disclosure is what counts.

Personally if it were me I would give up 50k of pension pot I cant access for years in return for maybe 30k of cash now.

The house equity is also tax free while the pension is subject to tax.

Dox

SabNys wrote: »

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).

Your son in law has a house in his own name and is currently paying the mortgage in full, according to your other posts. Although 50-50 is a starting point for dividing assets, many other factors come into play to vary this, not least the length of the marriage, the wife's assets/whether she has taken a career break to raise the children etc. With so much information lacking, it's impossible to give any sensible response to your post on this forum, although I can see many have had a noble attempt at doing so!

Really one for her to discuss with her solicitor rather than relying on out of date articles in the Telegraph, which bear little relation to her particular situation, or indeed the current state of the housing and investment markets.

I'd be astonished if her husband thought her 'solution' was remotely acceptable, particularly as he has quite a modest pension value for someone who is apparently good at his job, never going to be unemployed etc. Perhaps all his cash has been ploughed into paying off a mortgage which has been a stretch too far for the couple?