Pensions And Divorce: How To Protect Your Benefits

Divorce can be difficult in many ways and often comes with financial stress. Depending on your situation, you may be trying to unravel and divide assets that have accumulated over years or even decades. A pension is just one of many different assets, with distribution depending on the laws of your state as well as your specific situation. Because of this, it’s important to understand how divorce can affect your pension.

What Are Pensions And How Do They Work?

A pension is an employer-sponsored fund intended to help employees save for retirement. A pension typically guarantees a set monthly income to an employee in retirement, though some pensions also allow employees to take a lump sum at retirement. Pensions are a traditional form of retirement plan, and they have grown increasingly less common over time.

A pension is generally completely controlled by the employer. This means that the employer contributes money into the pension (often a percentage of the employee's salary), the employer manages the account and chooses the investments. While a pension and a 401(k) are both types of retirement accounts, employees with 401(k) accounts generally have much more control both over how much they invest as well as how their investments are managed.

How Are Pension Benefits Handled In A Divorce?

When it comes to pensions and divorce, you might assume your pension will automatically be split with your ex-spouse. However, pensions are handled differently based on the specifics of your pension plan, where you live and the qualified domestic relations order (QDRO) filed by your spouse. It’s possible to keep your pension entirely intact after a divorce settlement.

Pensions are typically considered joint marital property, which means that they are a benefit that’s considered an asset to be split in a divorce. However, pension funds earned prior to marriage are considered separate property. While laws vary by state, and it is possible to negotiate a different arrangement with your spouse, the most common way that pensions are split in a divorce is to evenly divide any pension benefits earned during the course of the marriage.

One other thing that you will want to be aware of when splitting a pension due to a divorce is whether there are any tax implications or penalty fees for splitting a pension in a divorce. Check with your pension administrator or a qualified professional to see how any taxes or fees might be handled.

What Is A Qualified Domestic Relations Order?

A qualified domestic relations order is a court order that specifies how any assets in a retirement plan or pension fund will be split in a divorce. Before a pension or other retirement plan will be split during a divorce, the requesting spouse must file for and be granted a QDRO. Before that happens, the plan administrator will not be able to make any changes to the pension plan or other retirement fund.

How To Protect Your Pension In A Divorce

Divorce is often a very stressful time, and worrying about financial insecurity is one potential cause of stress. Here are a few ideas for how to protect your pension during a divorce:

Understand Your Pension Plan

Knowing the details of your pension can help you prepare for how it’ll be handled in a divorce. Every pension plan is different, so the details of your particular plan will be important. Two important things to focus on in your pension plan are any survivor benefits and how payments are distributed (lump-sum payout or as a monthly annuity).

Know Your State’s Divorce Laws

Every state handles divorce and the splitting of assets differently. As such, it's crucial that you understand your state's divorce laws. Some states are equitable property states, while others are community property states. In an equitable property state, marital property is distributed "fairly" (according to the presiding judge), which may not be completely equally.

Nine states are community property states, where all marital property is generally split equally between both spouses. The nine community property states are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

Offer Up Comparable Assets

One avenue to potentially protect your pension is by offering alternative assets or similar value. For example, if your spouse has a pension of a similar value, you might decide to each keep 100% of your own pension, rather than sharing half of two different pensions.

Another possibility might be to negotiate a different split, by giving up your half of another asset. You might relinquish your claim to the family home in exchange for complete control of your own pension, as one possibility.

Work With A Professional

While it is often a good idea to work with a professional, it is especially true in divorces, where knowledge of applicable state laws is so crucial. A financial professional who specializes in divorce settlements or a divorce attorney can help you manage your marital assets and get the best outcome.

Going through a divorce is a very emotional time, and it can be difficult to make sound financial decisions when emotions are riding high. A seasoned professional can help keep you on track and make sure that you are making the best choices for your specific situation.

Pensions And Divorce FAQs

Is my spouse entitled to my pension if we divorce?

Laws vary by state and situation, but generally speaking, pensions are considered marital property. This means that in many cases, any pension earnings during the time you were married will be divided evenly during a divorce. However, every situation is different, so make sure to check your state laws and your pension documents, and consult with a professional to see how a pension is split in your situation.

What percentage of my pension does my ex-spouse get?

How pensions are split will vary depending on state laws and the rules of the specific pension. However, in most cases, pensions are considered marital property, which means that an ex-spouse would be entitled to 50% of any pension earnings received during the marriage.

Is a spouse automatically the beneficiary of my pension?

Different pension plans have different rules about who is and can be named as the beneficiary of a pension. In most cases, your spouse will automatically be considered your default beneficiary if you do not name a different one. Additionally, if you're married, you may be limited in who you can name as your pension's beneficiary. In some cases, your spouse may be required to sign a document before you'll be allowed to name someone besides them as your pension beneficiary.

Will I lose half of my pension in a divorce?

While every situation is different, it is generally true that pension earnings received during a marriage are considered marital property. This means that they will usually be split equally during a divorce. So while laws and financial situations vary, in many cases your pension will be split between you and your spouse during a divorce.

The Bottom Line

While it is common that pension earnings received during a marriage are considered marital property and subject to a split during divorce, a divorce doesn’t automatically mean you’ll lose half of your pension. Laws vary by state, and you may also be able to negotiate with your spouse to keep your entire pension in exchange for a different asset. It's important to know your options and be prepared to make sure you get the best result for your specific situation.

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