These days, one of the biggest benefits to holding a public sector job or sticking it out in the military is the promise of a juicy pension during retirement years. While pension plans have been largely replaced in the private sector by 401(k) plans, they are still going strong in the public sector. According to the U.S. Census Bureau, roughly 13.5% of working-age Americans have a defined benefit or cash-balance plan, which includes pension plans.
A pension plan represents a lot of money and can even make or break a retirement, so how is a pension handled during a divorce? Are you entitled to a piece of your spouse’s pension benefits during divorce, or, alternatively, can your spouse snatch away a portion of your pension?
When it comes to pensions and divorce, here’s what you need to know.
A Quick Refresher on Pensions
A pension is known in the finance world as a “defined-benefit plan,” meaning the employer will pay a definite benefit when the employee retires. For example, some military pensions guarantee to pay service members 50% of their ending salary each year after 20 years of military service. Pension benefits can add up to a lot of money, and it’s a far cry from many 401(k) plans, where an employer may offer to match a small percentage of the employee’s contribution.
Are Pensions Considered Marital Property?
Is a pension a marital asset? The rules around pensions and divorce can get rather complicated. Different rules apply to different kinds of pensions. For example, a private-sector pension falls under different division rules than a military or public-sector pension. Additionally, different states have unique rules.
However, one important thing is clear. Pensions are typically considered to be martial property when it comes to divorce. This means the spouse without the pension usually has a claim to some portion of the pension.
How Is Your Cut of the Pension Determined?
If you are the spouse without a pension, how much of your spouse’s pension are you entitled to? This may seem like a simple question, but it can get mired in rules and regulations that have to do with your state of residence and what type of pension your spouse has.
Marital property laws generally hold that each spouse is entitled to half or nearly half of any pension that was vested during your marriage. Community property states typically split all marital assets down the middle, while equitable distribution states may use a special formula to determine how to split a pension.
What is important to understand is that you are typically only entitled to the amount of pension your spouse has accrued during your married years. Any amount of your spouse’s pension that they earned before a marriage is considered separate property. For example, if your spouse vested in their employer’s pension for four years before your marriage, that money is not marital property.
It can be difficult to figure out how much your spouse accrued before and during your marriage, which is why dividing pensions as well as other retirement benefits can be so tricky.
Of course, you don’t have to follow the guidelines of community property laws. As long as you and your spouse agree, you can split your pension any way you want (as long as a court will approve your divorce decree). That means you can make a property settlement that is unique to you. What does that property settlement look like? It depends on you and your spouse.
How Can You Get Your Cut of Your Spouse’s Pension During a Divorce?
If your spouse is the one with the pension DO NOT wait until retirement to ask for your share. Their pension will not be divided automatically during your divorce, either. You will have to take specific action during the divorce process in order to receive your share. This may mean filing a Qualified Domestic Relations Order (QDRO) with your spouse’s pension plan. You may also need a QDRO to receive your share of your spouse’s other retirement funds, such as their 401(k).
(Note: QDROs do not apply to government or military pensions. If you need to divide a government or military pension, you will need a COAP or Court Order Acceptable for Processing.)
The QDRO will tell the pension plan administrator how to divide the pension plan. In some cases, the pension is cashed out and you receive a lump-sum payment, which you can then transfer to your own retirement accounts. Alternatively, you can work out an agreement with your spouse to wait and split the pension when they retire, when they will receive either a monthly payment or a lump sum payment.
Is There Any Way to Save My Pension in Divorce?
If you are the spouse with the pension, you may not want to lose half of your retirement or be forced to cash out your pension before you are fully vested. Fortunately, if you and your spouse are willing to negotiate, there are several different ways you can protect your pension and reach a divorce decree you can both live with. Just keep in mind that you’ll likely need to give up something to make up for the value of your pension.
The absolute best way to protect your pension is to create a prenuptial agreement that specifically says you keep full ownership of your pension. Unfortunately, a prenuptial agreement is something you need to create before marriage. If you don’t have one, there’s no way to turn back time and put one in place.
You Each Keep Your Own Retirement Plans
If your spouse has their own pension plan or a different retirement plan that is of similar value to your pension, you can both agree to simply keep your own retirement funds and go your separate ways. Of course, if your pension plan is far larger than your spouse’s retirement plan, they aren’t likely to go for this compromise.
Give Them Enough Assets to Make Up for Your Pension
Your pension is worth a certain amount of defined money. If your spouse is willing to play ball, you can simply offer different assets in place of your pension that will make up the same or a similar amount. For example, if your pension is precious to you, consider offering to give up all your equity in the home in exchange for your spouse keeping their fingers out of your retirement. You can also offer up investment accounts or any other property your spouse is willing to take.
Life Insurance Policy
One final tactic is to offer to take out a life insurance policy on yourself for the amount of the pension and name your ex as the beneficiary. The drawback of this plan is that your ex will have to wait for you to pass away before they can collect, and it’s possible that they may predecease you and never see a dime.
Talk to an Experienced Divorce Attorney or Financial Expert
If you’ve taken anything away from this article, it should be that pensions and divorce can get complicated. If you or your spouse have a pension, it can be valuable to seek legal advice during your divorce settlement process. Work with a divorce attorney with specific experience in pensions. If you own the pension, your attorney can devise strategies to help you protect your pension. If you are a non-pension spouse, your attorney should have experience dealing with QDROs so that you can make sure to get your rightful share of your spouse’s pension.
Another option is to work with a financial specialist, such as a certified divorce financial analyst. CDFAs are educated in complex financial matters, like dividing a pension during a divorce. They can also help you calculate the value of the pension and determine how much the non-pension spouse is entitled to.
Pensions are only one part of a much bigger divorce puzzle. To learn more about what to expect during divorce, sign up for a Second Saturday Divorce Workshop near you.
Pensions and Divorce: FAQs
Losing a portion of your pension or receiving a portion of your spouse’s pension can shape your financial situation after your divorce. This is especially true if your retirement savings are not where they should be. Receiving a portion of your spouse’s income could represent income for life after you retire, while losing a big chunk of your pension may dramatically lower your retirement income. Make sure you understand the ins and outs of how pensions and divorce work.
How do I find out if my spouse has a pension during a divorce?
Not every spouse knows the financial details of their partner’s life, and it could be that your spouse has a pension and you don’t know it. If your spouse served in the military or worked in the public sector (for the government) for many years, it is possible they have a military or public pension.
Your spouse will be required to disclose the existence of their pension when listing out their assets as part of their asset disclosures during your divorce proceedings. If your spouse doesn’t list their pension, they could face legal troubles.
If you are a pension holder, you will likewise have to disclose your pension on your list of assets.
How will I receive money from a pension plan after a divorce?
The way you will receive your portion of your spouse’s pension after divorce will depend on a number of factors. First, if you decided to receive an equivalent payment or asset instead of the pension, you should receive that directly after a divorce. If you will be receiving money directly from the pension, the payment will depend on how the pension benefits are distributed. (For example, you may have to wait until your spouse retires or reaches a certain age until the pension begins paying out.)
When your spouse signed up for their pension, they likely had a choice between receiving a lump sum payment or a monthly annuity, which is a monthly benefit payment for the rest of their lives. Depending on their choice, you may receive a single lump sum payout or receive a portion of their monthly annuity.
How can I figure out how much a pension plan is worth?
It can be extremely tricky to value a pension plan during a divorce. For example, if a pension is paid out as a monthly annuity, its total value will depend on the lifespan of the spouse with the pension. Additional factors, like whether the pension plan includes a survivor’s benefit, add even more complexity to the mix. This is why it may require the assistance of a financial expert, like a Certified Divorce Financial Analyst to help you determine the true value of a pension plan.
How do I create a QDRO?
In order to divide certain pension plans, the non-pension spouse will need to execute a Qualified Domestic Relations Order or QDRO. After your divorce decree is finalized, the court can order a QDRO. Typically, an attorney or qualified professional will need to create the QDRO. This can be a complicated legal document that you shouldn’t try to create yourself. If you didn’t use a divorce lawyer for your divorce, you may need to hire one to create your QDRO for you.
If you know your spouse has a pension, make sure to alert your attorney, so they can include the pension in their divorce strategy. If you aren’t using a lawyer, notify the court, so they will ensure that the pension is divided as part of your divorce settlement.
The QDRO will need to be submitted to your spouse’s retirement plan administrator to make sure you get your cut of the pension when it begins paying out. Not all pension plans require a QDRO. In fact, military and government pension plans do not require a QDRO.
What can I give my spouse instead of my pension in a divorce?
If you want to keep your entire pension, then you’ll need to give your spouse something of value equal to their share of your pension. The first step is to determine the value of your pension. Next, you’ll need to figure out how much of your pension your spouse is entitled to. Your divorce lawyer and possibly a financial expert can help you answer these questions.
Once you know how much of your pension you owe your spouse, you’ll need to find valuable assets of equal value that your spouse will be willing to take. Every couple is different. Perhaps you have enough savings, investments, or other retirement assets to cover the amount you need. Maybe you can give your spouse an asset, like your equity in the home, a real estate property, or a vehicle.
Another option is to look at something your spouse wants. Remember, you are also entitled to half of your community property (or marital property). Maybe they have a retirement account that they’d like to keep. It may be possible to allow them to keep their retirement account if you can keep your pension. If your spouse owes you alimony (or spousal support) you can agree to waive your right to support in exchange for keeping your pension.
Your attorney or financial professional can help you develop a strategy to save your full pension if that’s a priority. Just make sure that any trade you make is a good deal for you as well as your spouse!
Will I still receive pension payments if my ex passes away?
If your ex-spouse receives a monthly benefit (or annuity) from their pension and you receive a share of that pension, what happens if they die before you? The answer depends on whether or not their pension includes a survivor benefit. If the pension does include a survivor benefit, you may continue to receive your pension payments even after your ex passes away.
Make sure you understand all the rules related to your spouse’s pension plan and what could happen to your pension share if your spouse dies before you. Your attorney can help you plan for receiving the most from your pension share.
“This article is reprinted with permission from the Women’s Institute for Financial Education (WIFE.org), creator of the Second Saturday Divorce Workshops. Founded in 1988, WIFE is a non-profit organization dedicated to providing financial education for women. Copyright 2019″