What is a pension?
We spend most of our adult working lives building a pension for retirement. Most people who have worked in Canada usually have The Canada Pension Plan (CPP). Some people may also have a private pension plan through a company. In many cases, private pensions are one of the largest financial assets that are negotiated during a divorce. The CPP is a special type of pension that is divided separately.
Defined-Contribution Plan vs. Defined-Benefit Plan
A defined-contribution pension plan is one where an employee contributes funds into their pension plan and the employer provides matching contributions up to a certain amount to allow employees to save for their retirement.
A defined-benefit pension plan provides a defined payment amount to the plan owner upon retirement. This type of plan guarantees a certain level of income upon retirement, which is calculated based primarily on length of time working for a company and the employee’s average salary.
What is an equalization payment?
An equalization payment is when one married partner pays the other to divide the increase in the value of their property during their marriage. When a couple decides to divorce, pensions that you or your partner had while you were married are a piece of property that is included when dividing assets.
How do I deal with my pension after separation?
During a divorce both spouses must calculate their financial position by calculating debts and assets. This is called your Net Family Property. Each spouse can have a different NFP and when one spouse has a deficit, that spouse is entitled to an equalization payment.
Valuing a defined-benefit pension
Your pension is an asset that must be declared upon separation. However, you are not obligated to divide your pension. How you and your spouse decide to divide your assets is entirely up to you.
Valuing the pension is done by the pension plan administrator. Either spouse can apply to start this process. An application for Statement of Family Law Value needs to be sent to the pension plan administrator. Some pension plan administrators may charge a fee of up to $800 to process this application.
After receiving the application for the Statement of Family Law Value, the plan administrator will provide the Statement usually within 60 days, if there are no issues present.
Dividing a pension
Once the parties know the Family Law Value of the pension, and all other assets, they can then negotiate how to divide their property.
Parties may decide to include the value of the pension in their net family property calculation, or they can also decide to divide the pension at source, meaning that a portion of the pension is transferred to the other spouse’s pension or a LIRA. A division of a pension at source means that the pension is taken out of the parties’ equalization calculation and only the other assets and property are divided. If the parties decide to include the value of the pension in the equalization calculation, they may still use a portion of their pension to satisfy their equalization payment owing to their spouse. A maximum of half of the family law value of the pension may be used to satisfy the equalization payment owing.
ward or separation agreement. This allows for the pension to be paid out immediately, as opposed to waiting until the plan member retires.
If both spouses agree, the equalization payment does not have to come from the pension. The payment may come from other sources such as the sale of the family home.
Applying to divide your pension
Once both parties have reached a mutually beneficial agreement as to how they will treat the value of the pension upon separation, the next step is to have a written agreement drafting the settlement instrument. Once this has been completed, the final step is to notify the pension administrator. This may mean applying to either divide the pension, or applying to request no division of pension if the pension is being excluded or was included in the equalization calculation and is being paid out in different method.
Remember, pensions do not necessarily have to be split evenly. It is the value of the pension that matters when dividing marital assets and determining fair equalization of assets. Using a process like mediation can help you answer the question, what happens to my pension during a divorce. Using mediation can help negotiate your separation agreement and allows parties to be creative and divide their assets in a way that makes sense to them.
When it’s time to go your separate ways, we can help you move forward peacefully.
Jennifer Curry - AccFM
Family Mediator at South Simcoe Family Mediation