If you or a spouse have a pension, it’s likely an important aspect of your retirement funds. Unfortunately, even with the most precise planning, life-changing events such as divorce or death of a spouse can occur.
If either of these unexpected events should happen, you may wonder where you’ll stand financially, both today and in the future. In some cases, your spouse’s pension could still play a role in your financial planning.
What Happens to My Spouse’s Pension if They Die?
What happens to your spouse’s pension in the event of their death is wholly dependent on the type of pension benefits they initially chose.
When selecting benefits, the pensioner will have the option to choose a single-life benefit or a joint and survivor benefit.
Single Life Benefit
When choosing a single-life benefit option, the pensioner receives monthly benefit payments that are only expected to last for their lifetime. These benefits tend to be higher per month but will cease when the pensioner dies.
Joint and Survivor Benefit
This type of benefits option will provide a monthly payment for the lifetime of the pensioner and the spouse. Once the pensioner dies, the spouse will typically receive anywhere from 50% to 100% of the monthly benefit, depending on the plan that is chosen, for the duration of their life. The monthly payment will be lower as the percentage increases for the survivor.
What Happens if We Get a Divorce?
In most divorce cases, it is up to the court to determine what portion, if any, a spouse will receive of the pension benefits.
Pension benefits are considered joint marital assets since they are most likely earned during the marriage.The court will determine how to split the pension during the asset division portion of the divorce proceedings, and the payment plan for the settlement will be set up up in a Domestic Relations Order.
Depending on the city, state, and county that the divorce occurs in, there may be different methods for which a spouse will receive court-ordered pension payments, though most companies will now pay spouses directly. A court may decide to separate the assets in a few different ways:
- Offset the Pension Amount – This can be done by giving a spouse a significant portion of the assets, such as the house, in return for allowing the pensioner to keep their full pension. There are a couple of things to consider when choosing this option. The first consideration is the tax on the amount. A house can usually be sold after a divorce, and 100% of the proceeds can be tax exempt, whereas a pension only allows for up to 25% of the value to be tax-free. On the flip side, a pension is protected from creditors, whereas a home is not.
- Share the Pension – Pension sharing is becoming one of the more popular choices for divorced couples, as it allows for a clean break during a divorce. When a court decides to have spouses share a pension, the agreed upon percentage will come out in one lump sum that can be transferred to an account under the spouse’s name.
- Earmark the Pension – In this decision, a percentage of the monthly payments will go to the spouse after their previous partner has retired. When this is the ruling, you will have to wait until your ex-spouse retires before receiving any benefits. Plus, if they have chosen a single life policy, you will stop receiving compensation in the event of their death.
What Happens if I Remarry?
If the divorce court rules for you to earmark a pension as part of your settlement agreement, it is possible to lose this compensation if you remarry. Spouses who plan on remarrying soon after a divorce may find that splitting the pension at the time of the settlement could be their best option.
Contact BP Financial in Austin TX for Help with Your Retirement Planning
If you have questions about your pension or your spouse’s pension, contact the financial experts at BP Financial in Austin TX today.