Divorce and Pensions: Strategies for Smart Financial Planning

woman performing pension calculations

Dividing assets in a divorce is rarely as easy as adding up the value of everything and dividing by two.  Some assets are more complicated than others.  One asset that definitely lands in the “complicated” category is a pension.  So, if you are considering divorce and either you or your spouse has a pension, you will want to read on to understand some of the considerations you need to address.

Understanding Pensions

Pensions are a kind of retirement account where the employer puts in money for the employee for each year the employee works.  Then at retirement, the employe is entitled to a monthly payment for the rest of their life, or a lump sum of cash that they can use to fund retirement.  Although pensions aren’t as popular as they once were, there are still many professions, like teaching or public service, that offer them.

For people who receive pensions, the money may represent the bulk (or even all) of the retirement savings.  And if any part of the pension was earned during the marriage, then it is considered marital property subject to division during a divorce.  However, if you are still in your working years and not yet collecting the pension, the value is not necessarily known, and it can be challenging to divide.

Assessing the Value of a Pension

Like other retirement accounts, the amount of money in a pension includes both the deposits made by the employer and the investment growth on those deposits.  In the early years of a career, those numbers will be relatively small, but as the account grows, the impact of investing the account grows as well.  This leads to the largest years of growth being in the later years of a career.  If you calculate the split of a pension based on the value on the date of divorce, then you ignore all of the future growth potential on those assets.  Similarly, it is not enough to say the pension will be split fifty-fifty.  What is it that will be split?  The current value? The value at retirement? The payments during retirement?  What about any future cost of living adjustments?

This is where professional guidance can be priceless.  Divorce financial experts like CDFAs have experience in separating pensions and know the issues to look out for.  They also understand something called a coverture fraction which is a specific formula that you can use to calculate which part of a pension is the marital portion and what the future value of that part might be worth so that you can do an accurate forecast of various settlement options.

Another wrinkle to consider is the impact of a pension on social security.  Certain state related pensions are provided in lieu of social security benefits.  If either you or your spouse has such a pension, then you need to be aware of that and calculate the future impact of that reduction/elimination of social security on your retirement.

Pensions and the Law

Similar to other employer retirement benefits, pensions are governed by the Employee Retirement Security Act of 1974 (ERISA).  As such, there are very specific rules in place to protect employees and you will need a QDRO in order to divide a pension (read more about QDROs here).  It is especially important that you have the QDRO drawn up and filed as part of the divorce proceeding.  If this is not done promptly you risk losing your rights if the money is taken out or the record keeper changes.

Pension Negotiation Strategies

As with all assets being split during a divorce, there are a number of ways you and your spouse can choose to divide things.  One possibility is to split the marital portion of the future payments when you receive them in retirement. 

However, you also have the option to calculate what that future value might be and then decide to offset it with other assets now, such as real estate or other retirement accounts.  While this strategy helps you get things settled more quickly, you want to make sure that you understand the tax impacts of these trade-offs and how it will affect your future retirement. 

Your financial planner or CDFA should be able to help you run various scenarios and show you how they will affect you both now and in retirement.  Be sure that you communicate your priorities and needs to your divorce professionals and that you take the time to understand both short and long-term implications of all of your options.

Documentation and Implementation

As you can see from this discussion, pensions are a complex asset.  Not only do you need to understand how they work and how they can be divided, but you also need to ensure that you properly document any agreement you make.  Your decree should very specifically address what is being divided (current value or future value) and when it will be divided (now or at retirement).  One other point to address is what will happen to any survivor benefits if you or your spouse should pass away early.  And don’t forget to have the QDRO drafted and filed with the record keeper as part of the divorce filing process.

Pensions can be valuable retirement assets to those who earn them.  But they are also complex and need to be handled with care during a divorce.  If either your or your spouse has a pension, and that pension was earned (at least in part) during your marriage, make sure you have the right professionals involved in helping you understand and divide it.  Your lawyer or mediator can handle part of that puzzle.  You will also want a financial expert, like a CDFA, who is skilled at pension calculations and financial forecasting to help you make the best decisions for your situation.

If you are interested in learning about how I can help you take charge of your finances as a newly single woman, please contact me at  or schedule a free 20-minute consultation.

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