How Is a Pension Valued in a Divorce?

Are you losing thousands of dollars due to the financial fears that arise during the process of dissolution or divorce? The cost of the divorce itself is undeniably one of the biggest concerns clients express. There is no question about it. The duration and expenses involved in divorce proceedings usually exceed initial expectations. However, it is crucial to understand that taking shortcuts or cutting corners is not advisable, as it may have long-term consequences that could further impact your financial situation. It is essential to approach this challenging situation with a full understanding of what you own and to seek professional guidance.

A note before you read on: this post covers how a pension gets valued. If what you are really deciding is whether to keep your pension instead of dividing it, start with Can You Keep Your Whole Pension in a Divorce? and come back here for the number.

Valuing a pension for divorce

One frequent corner cut is a pension valuation. Pension valuations do not take a lot of time. However, they do require you to work with someone other than your attorney. Thus, even when recommended by their attorneys, many clients choose not to have them done.

It is not even necessary to meet with your valuation expert in person. All required information can be provided via phone/email. In some cases, the attorney can even provide all the relevant information. I recognize that it can feel stressful and overwhelming to work with yet another professional and have yet another bill to pay. However, it could be one of the best returns you ever receive on an investment.

Valuing a pension based on the future pension benefits rather than on the contributions will often show that it's worth more than you may have realized. This is especially important to consider if the participant spouse is trying to keep their pension intact. It's important to fully understand the value of what you're giving up.

Pension Valuation: What You Will Learn

As I mentioned before, you will find that the value from the most recent statement is not the value that should be considered when dividing assets. There are numerous variables to consider when valuing a pension for divorce. We look at how much of the pension was earned during the marriage to determine the portion that is marital property and the portion that is separate property. We also look at the amount of the projected pension benefit earned. We make actuarial assumptions regarding age and life expectancy. Future pension benefits are discounted back using the risk-free rate, which fluctuates as interest rates rise and fall.

Think about it in terms of the house, an asset that the average person is more comfortable discussing. When discussing the value of your home, would you use the value of your home on the date of purchase if you bought it 10 years ago? Probably not. Just as it is imperative to get an appraisal on your home, it is equally as critical that you get a valuation on any pensions that are part of your marital estate.

While you think you're saving yourself some money by not getting it done, you may actually be giving up a lot more than you would be spending. If you would like us to help you with your pension valuation, schedule a call with us so we can discuss the information needed to get started. 

Items to Consider When Valuing a Pension for a Divorce Settlement:

1. Employer and Employee Contributions

The first thing to consider when valuing a pension for a divorce settlement is the contributions made by both the employer and employee throughout the course of the marriage. This information can be obtained from statements provided by the pension plan or through payroll records.

2. Length of Marriage Relative to Length of Pension Participation

The length of time that you and your spouse have been married is also an important factor in determining the value of a pension in a divorce settlement. In most cases, only contributions made during the marriage will be considered as marital property. 

3. Vesting Status

It's essential to know whether or not your pension is fully vested at the time of valuation. A fully vested pension means that you are entitled to receive all benefits from the plan, even if you were to leave your job. If your pension is not fully vested, then only the vested portion will be considered as a marital asset.

4. Retirement Age

The age at which you plan to retire can also impact the value of your pension in a divorce settlement. If you and your spouse are close in age, then it's likely that both of you would have similar retirement dates. However, if there is a significant age difference between you and your spouse, then this could affect the amount of time that contributions are made to the pension and, ultimately, its overall value.

5. Division of Pension in Divorce

Once you have a real value, how the pension actually gets split, shared interest or separate interest, and what happens to survivor elections, is a separate decision covered in Dividing Pensions in a Divorce: Shared vs. Separate Interest.

6. Options for Receiving Your Share

Your choices for receiving your share, whether that is a lump sum, a separate interest in your own name, or monthly payments, are set by your plan's rules, and those options are explained in the same post on shared versus separate interest.

7. Tax Implications

A pension is a pre-tax asset, so the benefit is taxed when it is paid, to the participant and to the non-participant spouse alike, which means the valuation number should never be compared dollar for dollar against after-tax assets like a bank account.

8. QDRO or Similar Court Order

The order that carries out the division, a QDRO for a private plan or a DOPO or COAP for many public plans, comes after the value is settled, and you can read what those orders do in QDRO: I need a what??

9. Seeking Professional Analysis and Guidance

A Certified Divorce Financial Analyst (CDFA) or an attorney experienced with pensions can run the valuation and, just as important, check the assumptions behind it before you agree to a number.

10. Finalizing the Division

Once you have agreed on the value and the order has been drafted, the court still has to approve the division before the plan will act on it.

11. Moving Forward

Whatever number you settle on becomes the foundation of your retirement plan, which is the whole reason to get the valuation right the first time. If you are weighing whether to keep the pension rather than divide it, read Can You Keep Your Whole Pension in a Divorce?

In summary, when dealing with the complexities of divorce, it's paramount to accurately assess the value of retirement benefits, including pensions and other retirement accounts. These assets, particularly a pension plan, play a crucial role in determining a fair division of marital assets. The valuation process goes beyond merely calculating contributions made during the marriage; it also involves understanding future benefits, the pension plan's vested status, retirement age, and the associated tax implications.

Seeking guidance from a Certified Divorce Financial Analyst gives you a full evaluation of these retirement assets. This careful approach is essential not only for a just resolution of the current divorce proceedings but also for safeguarding your financial well-being in the post-retirement years. Skimping on this process can lead to significant financial disparities and long-term implications, underscoring the importance of meticulous attention to every detail in the valuation of retirement benefits and accounts during a divorce.

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.
• Divorce Coaching: Offering personalized support and guidance through the emotional and practical challenges of divorce.

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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If you are going through a divorce and seeking professional, empathetic support, we are here to assist you. Reach out to us to discover how our services can be adapted to your unique needs, empowering you to make informed decisions for respectful and positive outcomes.

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