Karen Telleen-Lawton: Pensions And Divorce
This article appears at the following website: noozhawk.com
Divorce is difficult in so many ways. Arguably one of the most difficult in a maelstrom of thorny decisions is how to split up retirement assets. California law awards half of community assets accumulated in a marriage to each spouse, but establishing the half isn’t as easy as it seems. Pensions are a case in point.
The first step is understanding pensions.
Companies today mostly offer defined contribution plans (DCP) where employees, and sometimes employers, contribute to retirement accounts. The DCP retirement account has a specific portfolio value at a given moment. Pensions are defined benefit plans (DBP) where the value is not easily quantifiable with a single number.
A pension is a promise by the employer to pay out periodically over a lifetime. Its ultimate value depends on many factors including the participant’s age, how long they were employed, the final salary, a possible cost of living factor, and ultimately how long they live.
The benefit also depends on whether it is to be paid out only until the employee’s death, or until the second death in a married couple.
When a couple is divorcing, they often submit their pension details to a pension expert who will use the plan’s payout details and make some assumptions about the employee’s age of retirement and death to provide various estimates of the pension’s future and present value.
Interpreting this document is extremely important to achieving a result that is ultimately fair to both parties.
The bottom line on a pension valuation is the community half-interest. This shows the cash value of the pension to each spouse. If there are several pensions, these cash values can fairly be used to “trade” off one pension for another.
In a fairly typical case, one person wants the house and the other wants the pension. It seems like a logical tradeoff, but both parties should be wary of using these figures to trade off other assets.
According to the Nuffield Foundation Guide to the Treatment of Pensions on Divorce, using the pension’s cash value for offsetting purposes is rarely appropriate. The option that is usually fairest is a figure based on the value of the pension holder’s “retained present or future benefits.”
As a simple example, say the monthly benefit on your spouse’s pension is $1,000 and the pension expert is valuing your community half-interest at $100,000. If your spouse offers you $100,000 for your half-share, however, will you be able to purchase the equivalent pension protection in the marketplace?
We had heard about annuities and were investigating them for our IRAs. We also heard bad things about pushy brokers over the years. So when we went to the ImmediateAnnuities.com site we were skeptical about calling them. But whenever we called their staff was really friendly. They answered all our questions and one of their reps even told us that at our ages there was no advantage to buying the annuity with our IRAs. These guys are really honest!
A private pension purchased in the marketplace is called an annuity. Annuities are bought through insurance companies. You can also check sample prices online at brokers such as immediateannuities.com. Here you can enter a purchase price of $100,000, along with your age and other details, to see what your monthly benefit would be.
Be careful to match the details of the existing pension as much as possible, such as any promised cost of living adjustment and the annuity’s start date.
Chances are, your $100,000 half-share won’t buy you half the monthly benefit, nor will it be as secure as a government pension. If the amount is lower, it is appropriate to argue for a large percentage of the pension. It is the monthly benefit that should be equalized, for that is the value that needs protecting.
If you’re separating from a spouse, you are already painfully aware that the next few years are going to be a grind, even if the divorce is amicable. Don’t be tempted to an equal division when what you want is a fair division of retirement assets.
An equal division means each partner gets the same amount, regardless of need or whether, for instance, one spouse’s pension accumulation capacity has been significantly impacted by being a primary caregiver. A fair division means each party gets what they need and deserve.