Pensions are sort of a thing of the past, having been replaced by 401(k) plans (where employees have as much responsibility to save for their retirement as the employer), but they do still exist for government employees and the military, and for people who have been employed by a large corporation for many years.
A pension is a promise to pay a monthly benefit for the rest of an employee’s life, and if there is a survivor benefit, for the rest of the spouse’s life when the employee dies. It is calculated by a formula which is commonly based on years of service, final pay and a multiplier. Pensions are put in place by employers to encourage long-term employment.
Pensions are a highly valuable asset, often the largest asset in the marriage. Dividing one in divorce is complicated and sometimes contentious. For various reasons, I find people are possessive about their pensions, and they are usually surprised by the accumulated value.
If there is ever a time when anger and tears come out when I meet with clients, it’s when they find out their pension is divisible and when they learn just how valuable their pension is. Why does that upset them? Because other valuable assets must be traded if they want to keep their pension. It’s common for me to find the value of a pension is above, and often way above, $500,000.
In a divorce, pensions must be valued. I tell my clients to think of the value of a pension in the following way: What lump sum of money would I need to invest to guarantee that starting at retirement, there would be enough money to pay me a monthly amount for the rest of my life? To answer that question, I need to know the following:
First, I must determine the monthly pension payment. Pensions are based on a formula set out in the plan. Determining years of service may not be as straightforward as you might think, particularly if the pensioner has been in the military because their years of service may not coincide with calendar years.
When do payments begin? In the military, a service member is eligible for a pension after 20 years of service, and their pension begins as soon as they retire. In the federal government, the pension commencement date depends on years of service and age. In private plans, usually a pension is not payable until around age 65.
Based on the persons age now, using an actuarial table, how long is that person expected to live?
Are there cost of living increases and if so, how do those get added when computing the value?
What portion of the pension is attributable to years you were married (the marital portion)?
Calculations include present and future values and knowing what discount rates to use. Sound Greek to you? Calculating a pension’s current lump sum value is something few divorce professionals know how to do, including many experienced attorneys.
The time and method of distribution are negotiable points. When will the pension start? Will the employee pensioner take the pension over his life only or take a joint and survivor payment so that when the pensioner dies, it will continue on for the surviving ex-spouse?
The age at which a pension begins and the payment method affects the amount of the monthly pension. It’s VERY important to get this right in both the settlement agreement and the court order that divides the pension!!! If your divorce professional does not know to negotiate these, you could find yourself without a stream of income you were counting on in your retirement.
Dividing a pension always requires a court order. If not done correctly, a pension the non-employee spouse was relying on for support in retirement could very well not be there.
There are many mistakes to be made which could have a serious impact on your financial future. Every pension is unique and that is something many divorce professionals do not realize. They have unique formulas, language, retirement ages, rules and benefits, including death benefits, and it takes expertise to know and understand the variations.
Involving a Certified Divorce Financial Analyst in divorce, particularly when a pension exists, can not only ensure the division of assets considers the correct pension value, but can protect you from making a financially devastating error.
Is a pension part of your retirement income? Would you say losing your pension or marital portion would completely destroy your retirement plans? Have you looked into the matter of pension and divorce?