How To Keep Your Pension in a Divorce
An attorney can assist you with possible alternativesBy Kimberly Lekman, Esq. | Reviewed by Canaan Suitt, J.D. | Last updated on March 31, 2023
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If you are going through a divorce, you are probably busy making living arrangements, custody plans, and coping with this major life change. With all this upheaval going on, your retirement savings might not be the first thing on your mind. But it’s important not to let the financial aspects of your divorce get lost among all of the other issues you might be tackling.
If you or your spouse has a pension, you might find that this is a complex asset to deal with in your divorce. Pensions earned during the marriage are generally considered marital property subject to division. But you do not necessarily have to lose half of your pension to your divorcing spouse.
The following overview will help you understand how pension benefits work and what you can do to keep your pension in a divorce. Because pension plans and state laws vary, talking to an experienced divorce attorney about this issue would be wise.
How Do Pensions Work?
Unlike 401(k)s or other retirement plans, pensions are considered a “defined benefit” plan. With a pension, your employer deposits funds into the pension, and you then receive a fixed amount of retirement income for life. Pensions are less common now than they used to be. Teachers, military members, and other government employees are those most likely to receive pensions now.
Most private-sector employers offer a 401(k) instead of a pension. A 401(k) is a “defined contribution” plan. You use it to make pre-tax contributions to an account that is usually linked to a mutual fund. You bear the risk of loss, and you benefit from the gains you make. Some employers make matching contributions to employee 401(k)s as a perk of employment.
If you have a pension, it’s a good idea to ask your pension plan administrator for the details of your plan. These details can help you work out your divorce settlement.
With most pensions, you have the option of a one-time payout or a monthly annuity upon retirement. Further, some plans offer a benefit to the surviving spouse. This is called a joint-life payout. With a joint-life payout, the surviving spouse will be entitled to continued payments after the spouse who earned the pension dies.
If you choose a monthly annuity and you have a joint-life benefit plan, your former spouse will continue to receive payments after you die. By contrast, if you have a single-life payout, the payments will end upon your death.
Will You Have To Split Your Pension in a Divorce?
Your spouse will not necessarily take a portion of your pension benefits in a divorce. To understand your options, you will need to know how your state’s laws work. It would be best to consult with a divorce attorney before making any assumptions about property division where you live.
However, in most states, pension benefits that you earn during your marriage are considered “marital property.” Your marital property might also include a house you bought during your marriage, mutual bank accounts, and other assets. Depending on your state’s laws, marital assets are usually divided equally between spouses in a divorce.
Therefore, pension funds that qualify as marital property are usually split evenly between divorcing spouses. The exception to this rule would be if you have a valid prenuptial agreement in place.
If you earned a portion of your pension funds before marriage, that portion of the pension is not marital property. Instead, it will be considered separate property. Separate property is not typically divided in a divorce decree.
Keep in mind that you and your spouse are free to negotiate a divorce settlement that works for both of you. For many amicably divorcing couples, working out a mutually acceptable solution is the best option.
Negotiating an Alternative
When pensions are involved in a divorce, many couples agree to let the spouse who earned the pension keep it. Of course, your ex-spouse will want something in exchange for giving up their share of the pension.
Remember that your former spouse’s retirement accounts are also marital assets if they earned them during the marriage. So, if they have an Individual Retirement Account (IRA), 401(k), or pension plan of their own, you have a right to claim a part of their retirement plan in your divorce. However, it is often preferable for both divorcing spouses to keep their own plans. By keeping your own retirement accounts in place, you avoid the hassle and expenses involved with the division of these assets.
Alternatively, you might be willing to trade your half of another joint asset in exchange for keeping your entire pension. Other joint assets include family homes, vacation homes, vehicles, bank accounts, and others.
To create a fair deal, it might help to know the present value of the pension and your other marital assets. An accountant or financial planner can help you appraise these assets. You might also be able to find tools online that can approximate your pension’s value. You should also find out how your pension benefits are paid out. This could play a significant role in the negotiation process.
As discussed above, you might choose to take your pension as a monthly annuity upon retirement. If the plan offers a joint-life payout, your ex-spouse might prefer to maintain this survivor benefit rather than insisting on their share of any lump-sum payment. You should discuss this option with them because it might be the best choice for both spouses.
The deal you strike with your former spouse on the division of assets is highly personal. Your decision will come down to your personal preferences and the details of your financial situation.
If you and your ex-spouse decide to divide the pension, you will need to submit a qualified domestic relations order (a QDRO) to the pension administrator. A QDRO tells the administrator how to distribute the pension payments when the time comes. If a federal agency administers your pension, you probably need to submit a Court Order Acceptable for Processing (COAP) instead of a QDRO.
How a Lawyer Can Help
Going through a divorce is a significant life change and can be highly stressful. You may have concerns about how the divorce will impact your financial outlook and retirement benefits.
An experienced divorce lawyer can help facilitate a negotiation between you and your spouse. It can be extremely helpful to have a third party, like an attorney, involved in these types of conversations.
If alimony or child support issues remain unresolved, a divorce attorney can provide legal advice and work toward mutual agreement on these issues too. Your attorney can also take care of important paperwork such as a QDRO or COAP for dividing a pension if necessary.
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