Divorce and your pension: what you need to know
You might be surprised to learn that divorce rates in Canada have been steadily declining since the 1980’s. Even so, that still means approximately 40% of marriages end in divorce.
Going through a divorce is no easy feat. Emotions run high. Couples can be so busy feeling hurt and angry that they lose sight of rights and obligations. And since divorce can have big financial impact, it’s so important during this time to have all the information and receive the right advice for your situation. That includes information about what can happen to your pension.
As you likely know, The Ontario Teacher’s Pension Plan (OTPP) is a defined benefit plan, meaning that your pension is defined by a formula that takes your average salary and credit into account. Contributions are matched by employers and the government, and you will receive a regular income after you retire. According to the OTPP, the average teacher now retires at the age of 59, with an annual pension of approximately $50,000.
Will divorce affect your pension?
The short answer: maybe. But like marriage, and divorce, it’s a little more complicated than that.
When you’re going through a divorce, your pension must be included in the valuation of your family assets. The OTPP calculates the value of your pension that accumulated while you were married, and reports that value – known as the Family Law Value (FLV) – to you.
However, it’s up to you and your spouse to decide if the value of your pension is going to be used to equalize your obligations to each other. For example, if you jointly own other assets that are valuated at the same amount as your pension, you and your spouse may decide that you keep all of your pension, and they keep some of the other assets that are of equal value.
If you do choose to use your pension to equalize your property, your soon-to-be former spouse is entitled to a maximum of 50% of the value of your pension accrued during the time you were married, regardless of how long that was. This will be seen on your future Statement of Pension Benefits as an FLV reduction.
There are some other things to note about divorce and your peension. For example, a spouse from a marriage or common-law relationship that began after you started receiving your pension isn’t eligible for the division of your pension. And, if you separate from or divorce your spouse after retirement, your spouse at the time when you get your first pension payment continues to be entitled to a survivor benefit on your death unless they waive this benefit.
Further, your former spouse may also become entitled to the division of your pension through a settlement of your equalization obligations under family law. However, the division of your pension is neither mandatory nor automatic.
Determining the value of your pension
The way the OTPP valuates your pension is fairly straightforward. But given that your pension reflects a present value of a future income stream, there are two approaches that lawyers may use during divorce to determine the value.
1. An “if and when” approach
This is when your soon-to-be former spouse waits until you retire, and the pension amount is divided between both parties on a monthly basis.
The downside to this approach is that if circumstances change, the person who’s waiting to get the pension payment may get less than otherwise anticipated. For example, if you leave your job as an educator, depending on your age, you may not get a monthly payment but rather a commuted value payment. A commuted value payment could be a lump sum that would be calculated at the time you leave your job (which would generally be a lesser amount than if you had worked until the age of retirement).
2. A lump-sum approach
This is when your pension is valuated and then you can choose to use it, or part of it, to equalize your portion of assets (or choose to equalize with other assets such as an RRSP, TFSA or Non-registered assets).
To determine the value, lawyers will usually look at the values on the earliest retirement date, latest retirement date, and a retirement date somewhere in between. Often the median value is used unless there was a well-established intent of retiring at a certain age like 55, 60, or 65.
A couple of other considerations are the inflation factor – if the pension is indexed, the lump sum should increase because of this provision. And tax implications are also taken into consideration when it comes to future use of the funds. If the lump sum is for pension purposes, there likely won’t be much in the way of tax issues as it is split throughout retirement, but if the intent was to purchase property for example, the tax implications are significantly higher in one year and the value of that lump sum payment is diminished.
Another thing to consider is that pension valuations don’t include the value of non-guaranteed increases to pensions. A non-guaranteed increase could be an ad hoc one-time increase (although there’s no promise that this will happen). But if it does happen, it can add thousands of dollars to a pension’s value and the pension’s owner will keep more of it. Good news if you’re the one with the pension.
“There’s no doubt that divorce is complicated” says Educators Chartered Financial Divorce Specialist Franc Oliveri, “and that’s why it’s so important to get educator-specific advice to help you make decisions that will serve you well in the future.”
Want more information on divorce and your finances? We can help with that.
Since 1975, Educators Financial Group has been helping members of the education community plan for the future they want, including through divorce and beyond. Our financial advisors understand your pay grid, pension, and the unique financial challenges you face. And we have subject matter experts who are positioned to offer educator-specific advice and information for your unique situation.
