What’s a Pension?

A pension is a type of retirement plan that provides you with monthly income after you reach retirement age. Your employer contributes money to a pooled account that’s invested for the benefit of its employees, the plan participants. Depending on the structure of the plan, as an employee, you may be required to contribute part of your pay to the plan, too. Social Security is, in effect, a pension plan.

Why are Pensions Such a Great Benefit?

Americans are living longer and longer. The number of Americans living to age 100 and beyond has been increasing steadily for decades.

As you can imagine, the longer you live, the more financial resources you’ll need to fund your living expenses. If you live “too long”, there’s a real risk that you could deplete your investments.

Pension plans – and Social Security – are so valuable because they provide a stream of income that you can’t outlive. In the case of Social Security, that income is adjusted every year for inflation, so that you don’t lose purchasing power. Many pensions are also inflation-indexed, with a COLA (“cost of living adjustment”).

How are Pensions Handled in a Divorce?

Generally, pensions are treated in one of two ways:

  • The spouses can agree to share the monthly annuity payments during retirement
  • They can divide the “present value” of the pension at the time of the divorce

Typically, an accountant or actuary will be asked to value the pension as of the agreed valuation date.

A pension benefit earned during your marriage is typically considered to be joint marital property, and so would be subject to division in a divorce. If some of the pension benefit was earned prior to your marriage, it can be considered separate, non-marital property. You may hear the term “coverture fraction”, which is simply a formula used to calculate the marital portion of an asset like a pension.

When is a Pension Valued in a Divorce?

A pension will generally be valued at the same time that your other marital assets are valued, like your home, rental real estate, retirement accounts like 401(k)s and IRAs, and investment and bank accounts.

How is a Pension Divided in a Divorce?

Dividing a pension as part of a divorce settlement is not a simple as you might hope.

If you’re awarded a share of your spouse’s pension, you’ll generally need a document called a Qualified Domestic Relations Order (aka a “QDRO”, pronounced quad row) prepared by a lawyer or pension actuary. The QDRO will be delivered to the pension plan’s administrator. It details for the administrator how the pension benefit should be divided.

The QDRO is executed after your divorce is finalized, so it’s important to review and agree a draft before then. Once your divorce is completed, the final version of the QDRO can be delivered to the plan administrator.

Am I Entitled to any of My Ex’s Pension?

Whether you’re entitled to a share of your ex-spouse’s pension depends on a number of factors, including the state in which you’re getting divorced.

In an “equitable distribution” state – like Oregon – the court will divide your marital assets equitably, which many not mean equal (i.e. not necessarily 50-50).

In a “community property” state – like, California, Washington, and Arizona – marital assets are generally divided equally, meaning that each spouse gets half of each community asset.

Regardless of the property division method that applies in your state, you and your spouse may decide to divide your other assets in such a way that only one spouse keeps the entire pension. Be careful with this!

If your spouse asks you to accept other assets – such as equity in your marital home, or a share of a 401(k) or other retirement account – in exchange for your share of their pension, you should first consult with a financial advisor to determine if this is in your best interest. The longer you plan to live, the more valuable the pension will be.

Getting Help From an Advisor

If you need help with understanding the financial implications of divorce, consider working with a Certified Financial Planner™ (CFP®) or a Certified Divorce Financial Analyst (CDFA®). Advisors who hold these designations had to meet rigorous educational, experience and ethics requirements.

Contact us today to learn how a Certified Divorce Financial Analyst® can help guide you and answer your financial questions before, during, and post-divorce.