Pensions are incredible tools to help secure your financial future upon retirement. Many pensions hold significant value and are a critical financial planning tool for many teachers. What many teachers don’t realize is that half the value of their pension is at risk when they get married and separate. Couples who cohabitate are not safe either, and claims may be made against their pensions as well. The result can be financially catastrophic for teachers who cannot retire as expected and must work years longer or walk away from the equity in their home to preserve their pension fully. It’s a horrible position to be in. Although marriage is a beautiful union between two individuals sharing their love and support for each other, this does not mean you cannot also seek ways to protect your assets.
What happens to my Teachers’ Pension on divorce?
Family law in Canada recognizes marriages as a financial partnership. When the marriage ends, couples are expected to equally share the value of their assets. It does not matter if one person had nothing to do with acquiring the asset or the increased value of the asset; they get one-half the value.
When it comes to pensions, the value of the pension for the duration of the marriage is considered a marital asset, and you must share the value with your ex. How does this work? Here are some real-life examples.
Joe’s Story
Joe has been a teacher for 20 years. He is 46 years of age. His net pension on separation is valued at $510,000. The equity in the family home is $600,000. Joe has a decision to make—will he use his portion of the equity in the home ($300,000) to purchase his ex-wife’s share of his pension ($255,000), or does he transfer half the pension, so his pension is now worth half? Joe had planned to retire at age 59, but that is no longer an option. If Joe pays out the pension with the equity in his house, he nets $45,000, which is not enough for a down payment on his own home. If he takes his $300,000 in home equity, he can get a home of his own, but he won’t be able to retire for years, not even at age 65. The likelihood of Joe being able to save up money to buy a house is small as he has monthly spousal and child support to pay. The net monthly amount available to him is only enough to cover his living expenses.
Divya’s Story
Divya was two years away from retirement. Her pension is valued at $900,000. The equity in the family home is $600,000. Divya’s ex-husband is self-employed and has retirement savings of his own. On separation, Divya owes her ex-husband $450,000 for her pension. Her portion of the family home equity is only $300,000, so Divya is left in a “debt.” Divya must give all the home proceeds away AND a portion of her pension. She is 63 years of age and will have zero in savings, but she will have preserved most of her pension. At 63, however, Divya will unlikely be able to purchase a home and will need to rent. Divya’s situation is even more stressful because her husband for years said he would never take a portion of her pension. He changed his mind once he spoke with a lawyer and realized the amount he was entitled to. Divya has no recourse to hold him to that promise.
What is the solution to this problem?
A prenup agreement or a marriage contract is the answer. If you are a teacher and you are about to get married, you need to get a prenup agreement to protect your pension. If you are already married, don’t worry. You can still get a marriage contract or a postnup agreement. It has the same effect.
With a properly drafted marriage contract, you and your spouse can agree that your pension will not be shared in the event of separation. In Joe’s case, if he had a marriage contract, he would have his $510,000 pension intact and $300,000 to purchase a new home. In Divya’s case, if she had a marriage contract, she could retire on schedule and have $300,000 to purchase a new home. In both cases, a marriage contract would leave them both in a much stronger financial position for retirement.
People often say that a prenup or a marriage contract costs “too much.” Depending on the lawyer you choose, you can get an agreement in place, likely for $6000 to $10,000.
We view a prenup or marriage contract as an investment. Had Joe spent $6000 to get an agreement, he would have saved $255,000. That is a 4250% return on investment! If you are Divya, that is a 7500% return on investment!
Making this investment can be one of the smartest financial decisions you can make. With a 50% divorce rate (and 70% for second marriages), it is too risky not to get an agreement. While we hope you will never need to use the agreement, you will be happy you purchased this “relationship” insurance because you will have peace of mind your retirement plans are intact
How do I bring this up with my spouse?
Like with all difficult conversations in life, timing is important. You want to bring this up when you both are focused. Carefully choosing your words will be important so you do not come across as accusatory or suggesting that you don’t trust your spouse or you are planning to break up. Instead, you can bring it up as part of your financial planning discussions. The idea is that you both want financial security in the future. You can present it as an option for you both—you keep your pension, and your spouse keeps their retirement funds, RRSPs, etc. You can talk about colleagues going through costly and stressful breakups, and you want to avoid that by having this conversation now.
You may need several conversations to communicate openly and honestly and ultimately to decide together. Couples who share financial goals and open communication set the foundation for a stronger relationship.
Anna-Marie Musson
Anna-Marie Musson is a family lawyer in downtown Toronto. She is the principal of M&Co.Law Firm. www.mlawgroup.ca
This article is featured in Canadian Teacher Magazine’s Winter 2024 issue.