Q: How Are Pensions Divided on Divorce?
Pensions belong to both spouses and are divided upon divorce just like any other property that a couple may own.
Courts will use the “time rule” if a spouse is eligible for pension benefits on divorce. Under the time rule, the spouse who has the pension gives the other spouse a percentage of the pension. The percentage is calculated by dividing the number of years that the couple was together and getting the pension by the total number of years that the employed spouse had been earning the pension.
For example, Dick has been working for Acme for 5 years earning a pension in addition to his normal wages. Dick marries Jane. Dick and Jane are married for another 10 years while Dick continues to work for Acme and earn his pension. Dick and Jane decide to get a divorce. At the time of divorce Dick has the option of retiring at any time with a $300,000 pension.
Since Dick is eligible for his pension today the “time rule” applies:
Therefore, the community interest in the pension is 2/3 of its total value. The community interest will be split evenly while the rest remains with Dick. So in this example, Jane gets $100,000, which is her ½ share of the community interest of the pension. Dick gets, $200,000, which is his ½ share in the community interest of the pension plus the separate property interest that he earned before they were married.
Courts will use the “division in kind” method when a spouse is not yet eligible for pension benefits. Under the division in kind method, the pension-holding spouse is ordered to share their pension when they eventually retire. The pension is divided under the same division “time rule” method.
For those who do not like the idea of dealing with their spouse again when the pension-holding spouse retires, there is a “cash-out” method. Under the cash out method, a qualified actuary determines the pension’s present cash value. The idea is to give the spouse who does not hold the pension enough money today so that if they were to put the money in an interest bearing account it would be produce enough income to be worth as much as the pension.