Are You Entitled to Your Spouse’s Pension as Part of Your Divorce, or Is He Entitled to Yours?
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. Roughly 85% of public employees are enrolled in a pension plan, as well as 15% of private employees. A pension plan represents a lot of money and can even make or break a retirement, so how is it divided during divorce? Are you entitled to a piece of your spouse’s pension pie during divorce, or, alternatively, can your spouse snatch away a portion of your pension?
A Quick Refresher on Pensions
A pension is so valuable because it 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, an employer may guarantee to pay an employee 50% of their ending salary each year for the rest of their lives. That 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?
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 a joint asset when it comes to divorce, meaning 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 husband’s or 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.
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. For example, if your husband vesting in his 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 can be so tricky.
How Can You Get Your Cut of Your Spouse’s Pension?
If your husband or 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. Generally, this means filing a Qualified Domestic Relations Order (QDRO) with your spouse’s pension plan.
The QDRO will tell the pension plan administrator how to divide the pension plan. Oftentimes, 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 can choose to receive monthly payments or a lump sum payment.
Is There Any Way to Save My Pension?
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. Just keep in mind that you’ll likely need to give up something to make up for the value of your pension.
Prenuptial Agreement
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 husband or 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 accounts 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. (Here’s what divorce after 50 means for your retirement.)
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. (Here’s how to buy a home after divorce.)
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 policy 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 a Lawyer with Experience in Pensions If you’ve taken anything away from this article, it should be that dividing pensions can get complicated. If you or your spouse have a pension, work with a divorce attorney with specific experience in pensions. Your attorney will be able to help you calculate the value of the pension and determine how much the non-pension spouse is entitled to. 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. Pensions are only one part of a much bigger divorce puzzle.
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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.