Pension Plans

Pension Plans - How Are They Divided?

Pension During Divorce - Richard I. Lippitt | Michigan Family Law Attorney - plansThere was a time when virtually all workers who remained employed by a company for an extended period of time had the opportunity to earn a pension.

With the advent of 401(k)s, there is a lesser prevalence of pensions, but they are still important issues to many divorcing couples. Pensions are considered to be assets of your marriage and you will want to employ a family law attorney who understands all the intricacies involved in dividing pensions.

While it is true that both 401(k)s and Pensions are financial tools developed to provide income during retirement, they are not the same type of financial tool. A 401(k) is a savings plan that you pay into (and perhaps is “matched” by your employer) that has a true cash value. You will have paid into your 401(k) by having a small portion of each paycheck directed into your account. The 401(k) is very much a savings account. In fact, in most cases you can cash out your 401(k) at any time, although there would likely be tax ramifications and early withdrawal penalties. Also, many 401(k) plans have a provision that allows you to take a loan out against your account’s balance. In contrast, a pension is a financial tool that merely guarantees lifetime retirement income. You can’t “cash out” a pension or borrow against it. The pension will begin providing you with benefits at a specified time (perhaps age 65 or 70) and the benefits will cease upon either you and/or your spouse’s death. Unlike a 401(k), the pension will have no cash value. In most cases, your pension will have been funded by your employer, not by you.

Two Ways Pensions Are Divided Post-Divorce

When a divorcing couple reaches a settlement addressing a pension, there are two methods in which pension benefits can be distributed.

  • Shared Payment Method. Under this method, neither party can begin drawing pension benefits until the pension-holder retires. Therefore, one party is dependent on the other party to begin drawing benefits before they can do the same.
  • Separate Interest Method. Under this method, the pension is divided at the time the divorce is finalized. The pension company will then view it as though there are two separate pensions. This allows one party to begin drawing benefits while the other party doesn’t.

While the shared payment method usually yields a higher monthly payment amount, it does have one distinct disadvantage. The party that did not earn the pension benefit, usually (but not always) the wife, has to wait for the other party to begin drawing pension benefits before they can do the same. If the pension earner decides they’d like to remain working until they are 75 years old, then the other party is prevented from drawing benefits until that time. When parties are divorcing at a younger age, they may not be super interested in this detail, but it is a very important one. Your family law attorney should know how to recognize this nuance and help you plan accordingly.

If you are considering divorce or have been served divorce papers, call me. I've helped hundreds of people protect their family and their assets and I can help you. For a FREE Consultation Call (248) 921-7164