If you are a teacher, in the military, governmental worker, or any profession that still receives a defined benefit pension plan rather than a 401(k), you may be afraid that divorce could see it completely cut in half. When divorcing, assets both physical and financial that were shared in a marriage are often split in half between the spouses, and your pension is one of those assets. However, before you fear that your retirement benefits will be halved, there are some considerations you need to know when it comes to pension plans and divorce.
How Are Pensions Split During a Divorce?
A pension is considered joint marital property. However, if you had pension contributions before you were married, those are still considered individual property and cannot be split. This means that the value of your pension is not always the whole value of it. What needs to be calculated is the value of the pension from the date of your marriage to the date of your divorce. For some couples, this means their entire pension will not be cut in half, but rather they will split the value accumulated in just a few years.
The portion of your pension that is considered joint marital property is an important value to know since the most popular way of splitting a pension is to actually perform a buyout. In this, the value is calculated, then the pension holder gives up something of equal value to keep their pension whole.
This may not be right for every couple, though. Those that have been married a long time may very well split a pension in half and instead the couple may split monthly annuity payments upon retirement. When calculating this, however, since tax does apply when the monthly payments go out, that burden will also need to be calculated in to make sure the split is indeed fair.
Considering a Pension Split “Buyout”
The wonderful thing about divorce sometimes is that it is very much a bargaining game. If you and your ex-spouse chose to split the aforementioned present day value of your pension plan, you can actually negotiate them to have a smaller section.
For example, if a gratuity plan’s present value will be split in half, you may choose to give the spouse something of value, like the house or the car, in order to “buyout” some of that share. It means they may only get a fourth of your pension plan’s present value or none at all if you give an item of equal value.
This strategy is typically the most common course when it comes to protecting the value of your gratuity plan. You will typically find it explored more often in very young marriages where buying out the other party is not an expensive affair. Unfortunately, the larger the value of the gratuity, the more difficult it will be buy out. This makes it difficult for those in gray divorces, but if you depend on those benefits already, you may also want to protect them.
If you are on the cusp of retirement, or have held a profession that offers a pension for a long time, it is only natural to be worried about what will happen to it when you divorce. No one wants to watch their spouse walk away with half of everything they own, including their livelihood for retirement. If you are considering divorce, often what stands between you and an unfair split is a lawyer. You need good representation on your side to make sure you get a fair split. Contact us today to see what we at Beckman Steen & Lungstrom, P.A. can do to help you navigate these difficult waters.