Divorce can not only take a substantial emotional toll, but it can also have a lasting impact on your financial status. Separating your assets from those of your spouse can be particularly tricky if your pension funding is at stake.
A pension earned by one spouse is generally considered a joint asset, which means it’s subject to division in divorce. If a marital split is in the works, the following are four ways to protect your pension benefits as much as possible.
Dividing assets after a separation can be tough. Our friendly advisors are on hand to help you navigate this difficult time. Watch our video for some initial guidance on financial planning and divorce:
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Know the Rules
The first step of managing your pension while going through a divorce is knowing what the rules are in your state. Though a pension can be divvied up between spouses during divorce, that division isn’t automatic. Your soon-to-be ex would have to make a specific request for a share of whatever you’ve accumulated before the divorce is finalized.
In terms of how much either spouse is entitled to, the general rule is to divide pension benefits earned during the course of the marriage right down the middle. Though that means your spouse would be able to claim half your pension, they are limited to what was accumulated during the course of the marriage.
If you were enrolled in a Defined Benefit Scheme for 10 years prior to tying the knot, for example, any contributions you or your employer made on your behalf during that time wouldn’t count toward the amount a spouse could seek in a divorce.
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Check the Details of your Pension
Take a close look at the retirement benefits. The first step in valuing a pension in a divorce is determining if it is a defined contribution plan or a defined benefit plan. Defined contribution plans are valued as the total assets in the account. Defined benefit plans require a present value calculation.
With a Defined Benefit Pension for example, you normally have a choice between receiving a lump-sum payment or a monthly income payment at retirement. If you have the option to elect an annuity option without any spousal benefits, the payments will stop on your death. If the plan has a Spousal Benefit, the payments continue for the life of the surviving spouse.
It’s important to understand how the plan works because it affects how you’ll divide up the assets as part of the divorce.
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Propose an Alternative
Consider offering your spouse other assets if you don’t want to hand over half of your pension. You may allow your ex to retain ownership of a mortgage-free home that you own together. Or consider buying a life insurance policy equal to your pension benefits naming your ex as the beneficiary. In either case, you offset what your ex would get from the pension with something else of equal value.
You may have an out if your spouse also has a pension or other retirement assets to protect. If both of you have pension plans that are relatively similar in size, agreeing to walk away with what you already have can be a less time-consuming way to resolve the issue.
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Consultant a Professional
It’s always a good idea to speak to a financial advisor about your options regardless of your situation—whether you’re about to separate or are in the middle of divorce proceedings. Financial Advisors can help with the division of assets when spouses split up. A qualified Financial will review all your assets, including your pension, and advise how you the division of assets will affect your future along with any tax implications.
Getting divorced is stressful, and it pays to be smart about how you tackle the various financial issues involved. That’s especially true when your retirement is on the line. Before signing off on a division of your pension, take time to understand what your rights are and what options you have for working toward a compromise that will satisfy both you and your future ex-spouse.
When in doubt, make sure you consult someone who can help guide you through the proceedings.
Tracy Sumstad is a highly qualified and experienced Senior Financial Consultant with over 20 years of expertise in the Finance Sector. Tracy is well-equipped to provide comprehensive advice on financial planning and corporate solutions. Her focus lies in helping clients identify their unique values and goals, empowering them to make informed financial decisions that protect and enhance their wealth and success.
