Can You Keep Your Whole Pension in a Divorce?

It may or may not come as a surprise to you that a pension is frequently the largest asset negotiated in a divorce. With that said, it's not a foregone conclusion that you'll have to give up a portion of your pension as part of your divorce settlement. I'm surprised by the number of cases I see in which the parties decide the pension owner will retain it in its entirety. 

A note before you read on: this post is about deciding whether to keep your pension. If what you need first is what the pension is actually worth, start with How Is a Pension Valued in a Divorce? and then come back to the decision.

How do pensions work?

Pension plans, particularly in the public sector, function as a cornerstone of retirement planning by guaranteeing a steady income post-retirement. These plans, also referred to as defined-benefit plans, differ from personal retirement accounts like 401(k)s, which are more common in the private sector and are known as defined-contribution plans.

The unique feature of pension plans is that they promise a fixed retirement benefit, regardless of the fund's investment performance. This provides a level of income security for retirees, which is not usually present in defined-contribution plans where the retirement income depends on the investment's success.

That difference is the reason this decision is hard. A 401(k) has a balance you can point to on a statement, and either spouse can take a share of it and walk away. A pension has no balance. It is a promise to pay you income for the rest of your life, starting years from now, and you and your spouse have to agree on what that promise is worth before either of you can trade anything for it.

Common examples of pension plans include those for teachers, state and federal government employees, and military personnel. Each of these plans has specific rules and formulas for contributions and benefits, ensuring a stable source of income for retirees who have served in these sectors.

So, how can you protect your retirement income and keep your pension in a divorce?

How to keep your pension in a divorce

First, consider your overall financial picture. If you want to keep the pension, and it's one of the more significant assets in your marital estate, you're likely going to be giving up other assets. What are you willing to give up in exchange for the pension? The house, your share of a brokerage account, and a chunk of your 401(k) are all things I have watched clients hand over to keep a pension whole.

To answer that, you need a real number. The value of your pension is not the figure on your statement, which is a common point of confusion. A pension is valued by discounting the marital portion of the future benefits back to present value, and there are enough moving pieces that most people hire a professional to do it. For how that calculation works and what goes into it, read How Is a Pension Valued in a Divorce?

Once you know the value, consider the value of your other assets. Keep in mind that your pension was most likely valued on a pre-tax basis. When comparing your pension to other retirement accounts in your estate, it would be most similar to a retirement annuity. With that said, there could be some substantial differences based on the annuity contract and the pension plan's rules.

What you need to know when negotiating your pension  

Every pension does not have the same rules. For example, some state and local pensions will not pay survivor benefits to an ex-spouse. That's why it's essential to fully understand your pension's rules when negotiating whether or not to keep it.

Also, pension rules change over time. You may not have a crystal ball to know what the future of your pension holds. You should still at least be aware of how your pension's rules have changed over time and if the pension board has given any indication of future changes.

Consider the following:

Request a Plan Summary

A plan summary is, very simply, a document that gives a detailed description of the retirement benefits available to pension plan participants. Employers are required to publish this summary every few years and distribute (or make it available) to all participants. 

Read it before you negotiate, not after. It tells you whether an ex-spouse can be named a survivor, when you can start collecting, and what the plan will and will not do in a divorce. Those rules shape what you can realistically ask for.

When you started contributing to the pension plan

Document when you first started contributing to the pension plan. Was it before or after you married? Any amount contributed before your marriage could be considered your separate property, while anything added afterward may be considered marital property.

The “relative time” method is the most common method of dividing pensions during a divorce. The approach views each year of participation in the pension plan as equally important when it comes to the result. Therefore, if you and your spouse were married for ten years, but you participated in your pension for 30, then only 10/30 or 33% of the pension is considered a marital asset.  

That fraction does a lot of work in your negotiation. In that example, two thirds of the pension is already yours alone and never goes on the table. Your spouse's claim is against a third of it, and typically half of that third. So before you assume you have to buy back the whole pension with other assets, find out what share is actually in dispute. It is often much smaller than people expect, and that makes keeping the pension far more affordable than it first appears.

Forecast future benefits and assumptions included in that forecast

The pension plan determines the future benefit by an actuarial formula the employer provides. In the case of public employees, including teachers and those employed by the government, variables include:

• the number of years of employment
• an average of the highest years of salary (often the last 3-5 years averaged)
• the employee’s age as of their retirement date

Unlike a traditional retirement account, the value of your pension is not based on the money withheld from your income or added to the account over the years. Knowing that, whether you plan to split or keep your pension in a divorce, it’s important to contact someone with experience in doing so.

Survivor benefits and your pension

If you participate in a public pension, have you been contributing to that account in lieu of social security? While social security is not considered a divisible asset in a divorce, there is a precedence in certain states to offset the value of the public pension with the value of the spouse's social security benefit (since they've contributed to social security while you contributed to your pension). This does add some additional complexity to the issue, but it also may help you to negotiate keeping your retirement benefit intact.

This argument is worth raising out loud. If you spent your career as a teacher or a public employee and paid into your pension instead of Social Security, your spouse has been building a Social Security benefit the whole time that you cannot touch in the division. Ask your attorney whether your state allows that benefit to be weighed against your pension. Where it does, it can shrink or even erase what you owe your spouse for the marital share.

Survivor benefits matter too. Some plans will not pay a survivor benefit to an ex-spouse at all, and some make you choose a survivor option that permanently reduces your own monthly check. If your plan cannot name your ex as a survivor, that is a practical argument for keeping the pension whole and making your spouse whole with other assets instead.

How is a pension divided in a divorce?

If a pension is divided in a divorce, a portion of the future benefit is awarded to the non-employee spouse. 

Depending on the type of pension that is divided, either a Qualified Domestics Relations Order (QDRO), Division of Property Order (DOPO) or Court Order Acceptable for Processing (COAP) is required. These orders need to be signed by the judge and filed with the pension plan.

Related post: QDRO: I need a what??

We offer a long list of state and federal pension information on the Resources page of this site. That's an excellent place to find additional information about your specific pension if you're a public employee.

Should you retain your full pension in your divorce? 

It's important to remember that a pension is an illiquid asset. You can't pull money out of it whenever you need cash. Make sure that it fits within your overall financial goals. Sometimes having liquid assets is actually more valuable than having the security of the future benefit. If you are not sure if you can afford to keep your pension, contact us. We can work with you to create a broader financial plan to determine if retaining your full pension makes economic sense.

Ask yourself one question before you sign anything: if you trade away the cash and the house to keep this pension, will you have enough to live on between now and the day the pension starts paying? For some women the answer is yes and the pension is the right thing to protect. For others, the security of a check at 65 is not worth being cash poor at 50. There is no single right answer, only the one that fits your numbers.

Related post: Dividing Pensions in a Divorce: Shared vs. Separate Interest 

About Intentional Divorce Solutions

At Intentional Divorce Solutions, we're committed to guiding individuals through the complexities of divorce with an approach centered on empowered choices and respectful outcomes. Our team provides support and expertise in several key areas:

• Divorce Financial Planning and Analysis: Providing in-depth financial insights and strategies for a secure future post-divorce.
• Divorce Mediation: Facilitating respectful and balanced negotiations to reach mutually beneficial resolutions.
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Please Note: We focus on providing support and solutions in various aspects of divorce. However, we are not attorneys and do not offer legal advice.

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