How Are Retirement Funds Divided When A Marriage Ends?

When a marriage comes to an end, there are inevitably difficult and emotional decisions to make. Beyond questions about who keeps the house, how to care for the children, or how shared assets are divided, there is also the matter of retirement savings. For many people, a pension or retirement fund is one of the most valuable financial assets they will ever own, and what happens to those funds in a divorce is a question that needs careful thought and, in many cases, professional advice.

Many people are surprised to learn that a spouse can have a legal claim against a portion of the other’s retirement savings at the time of divorce. This is because, in the eyes of the law, a pension interest forms part of the couple’s joint estate if they are married in community of property, or it may be subject to division by agreement or court order in the case of other marriage systems. This can have a significant effect on both spouses’ financial positions, especially if one partner has built up a substantial retirement nest egg while the other has little or no retirement savings of their own.

The term pension interest refers to the value of a member’s retirement savings as at the date of divorce. In simple terms, it represents what the member would have received had they resigned from their fund on the day the divorce is granted. It includes the total contributions made to the fund, plus any growth, up to that point in time. How this amount is treated during the divorce process depends largely on the couple’s matrimonial property system.

For couples married in community of property, the law is quite clear. All assets and liabilities, including pension interests, are shared equally between spouses. This means that each spouse is entitled to half of the other’s pension interest at the date of divorce, unless they agree otherwise. The retirement fund is required to pay the non-member spouse their share directly, and this can happen either immediately after the divorce or later, depending on the circumstances and the non-member spouse’s preference.

For those married with an antenuptial contract that includes the accrual system, pension interests are considered part of the estate for accrual purposes. The growth in each spouse’s estate during the marriage is calculated, and the spouse whose estate grew less has a claim against the difference. In this case, pension interests are included in determining the value of each estate. The practical effect is that if one spouse accumulated significant retirement savings during the marriage while the other did not, the difference may be shared when calculating the accrual.

When a couple is married out of community of property without the accrual system, each spouse retains their own assets and liabilities, and pension interests are not shared unless specifically agreed to in a settlement. This means that unless there is a court order or mutual agreement to the contrary, each spouse walks away with what is in their own name, including their retirement savings.

An important practical consideration is how the retirement funds are paid out to a former spouse. Divorce orders must be worded clearly and correctly to allow for the payment of a portion of a pension interest. If the court order does not comply with the legal requirements, the retirement fund will not be able to act on it. This is why it is essential to work with a professional who understands how to draft a compliant order.

Once the non-member spouse receives their share of the pension interest, they typically have a choice to make: whether to take the amount as a cash lump sum, subject to tax, or transfer it to another approved retirement fund, which would allow it to continue growing on a tax-deferred basis. This decision can have far-reaching tax and financial planning consequences, and it is one that should be made with careful consideration of future financial needs.

It is worth remembering that retirement savings are often a person’s most significant asset aside from property. Dividing these funds fairly in the context of a divorce requires a sound understanding of the law, a careful review of each spouse’s financial position, and, often, difficult conversations about long-term financial security. It is a part of divorce proceedings that can be easily overlooked in the stress of separation but deserves proper attention for the sake of both parties’ financial futures.

In the end, while the rules are clear in principle, the personal and financial circumstances of every couple are unique. The division of pension interests in a divorce is a reminder of how intertwined personal relationships and financial planning become over time, and why it is so important to have open, honest conversations about money throughout a marriage, not only when it comes to an end.