The three main ways of dividing pension assets are offsetting, earmarking and sharing. Each of these has merits and pitfalls.
Offsetting means that one partner’s pension is traded off against the other’s assets accumulated from the marriage, such as the home or investments (or another retirement account). The goal is a fair share for both spouses.
Problems can occur when the pension is the largest single asset, as is often the case, and the parties lack other assets to trade off against it. Moreover, the value of a spouse’s share of the pension may be higher than the value of the assets being offered. Divorcing spouses use a present value appraisal to divide the benefits using the offset approach. The present value of the pension can be compared to the other marital assets subject to distribution to make a “trade-off.” In such a case, the pensionholder often keeps his/her pension and the spouse takes another marital asset of equal value to balance off the trade. One very common offsetting routine is the breadwinner keeps his or her retirement benefits by trading the family house to the other spouse.
In order to make a “trade,” of course, the value of the assets must be known. The present value report presents the current value of the pension for this purpose. However, to truly understand what is being traded, the future dollar value of the pension must be converted to today’s dollars. Then that value needs to be figured into the overall picture of the couple’s assets and debts to be divided. Caution should be used in trading off today’s assets for a future asset because no one knows what might happen to a pension. There are plenty of cases where promised pensions have been lost due to under-funding of pension investments, company bankruptcies, and other situations.
Earmarking splits the rights to the benefits of the pension when it becomes payable. When the pension is due to pay out, it pays both parties, with each party getting the percentage agreed upon in the divorce. Unfortunately, the participant, the worker who owns the pension, has complete control over how the pension monies are invested and indeed when they pay out, which could reduce the value of and delay the payment to the other spouse.
The courts now permit pension sharing, which allows the parties to split the pension into two individual pensions upon the date of divorce. Unlike Earmarking, sharing allows each party to retire when they want (within the pension scheme options) and to manage their own monies how they see fit.
Pension sharing is a complete and clean break away from one another. Unlike offsetting, it ensures that one party doesn’t get an unfair proportion of one asset and less of another. Both parties get their fair share of all assets, including the pensions.
Sharing that safety net with your ex-spouse can feel scary and unfair, but with so many variables regarding the future, a defined benefit pension represents a safety net because as it promises a guaranteed income for life.