Divorce: splitting your assets means rethinking retirement plan
Get financial advice before divvying up your RRSPs, pensions
When couples divorce, the law says their assets are divided 50/50.
So what does that mean for retirement plans? A complete rethink, say financial experts.
Certified divorce financial analyst Eva Sachs urges couples to get financial planning help before they divorce. Don't wait until after a separation agreement to discover the hidden costs you may face down the road.
She works alongside a family lawyer who does mediation work in her Toronto-area firm Mutual Solutions. Sachs says she sees a growing number of divorcing couples who can put their animosity on hold long enough to divide up the finances in a way that leaves them both with a future.
People say: "There's no way I'm giving up half of my pension," but it's not those assets — it's the value of those assets that have to be split.- Alison Anderson, Family Finance Solutions
"A lot of couples don't want to spend money fighting. They're saying: 'There must be a better way,' " Sachs told CBC News.
In divorces in Canada, all assets and liabilities are generally divided 50/50, but there are multiple creative solutions to achieve that division.
The key is to look at each partner's cash flow and expenses long-term, said Sachs, who works with many older couples since she co-wrote the book When Harry Left Sally: Finding Your Way through Grey Divorce.
Critical for older couples
"Financial planning is a critical piece as couples get older and are closer to retirement. The implications of each decision are greater because you have less opportunity for growth."
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A lot is driven by future spending projections, Sachs said.
"Because you are going through divorce, you're looking at a completely different forecast in spending."
Among the big questions parting couples must wrestle with:
- Where will each person live? Are they selling a house or does one partner plan to keep it?
- Are there children who need support — not just under-18s, but also adult children who need help?
- How long does each partner plan to work? Do they have a plan to transition out of the workforce?
- How do they plan to spend retirement? Travel, gardening, volunteer work? Each will have a different spending projection.
It might seem strange to be doing such detailed retirement planning at a time when life is already in turmoil because of an impending divorce, but Sachs says it gives everyone a chance to see the long-term implications of how they divide their assets.
"Couples who own a home may have a 'semi-launched' child living in the basement. That can affect the decision to sell the house, even child support," Sachs said.
"Nobody has to support that child, but as parents we want to help them out."
Splitting RRSPs, pensions
RRSPs and pensions are assets that must be divided, just as other assets are divided, says Alison Anderson, a financial divorce and planning specialist with Family Finance Solutions Inc. in Toronto.
"People say there's no way I'm giving up half of my pension, but it's not those assets — it's the value of those assets that have to be split," she said.
Dividing up RRSPs can be achieved without having to collapse investments or paying fees once there is a separation agreement in place, Anderson said. Ex-spouses don't have to remain at the same financial institution, nor do they have to have contribution room to receive an RRSP from their spouse.
The world is falling apart and you've still got to work and pay the bills and manage your life and you're making decisions that will impact you for the rest of your life- Alison Anderson, Family Finance Solutions
"With RRSPs in a divorce, the CRA allows you to move assets around in a way you otherwise can't do," Anderson said.
In estimating the worth of an RRSP investment, each investment is assigned a "notional tax" based on the best estimate of the holder's tax bracket in retirement. That is because RRSP income will be taxed as it is withdrawn. Sometimes an actuary is needed to calculate the figures.
There is also a complex accounting process for dividing up workplace pensions, including defined benefit pensions, with varying rules depending on where the pension is registered.
"If one partner is collecting the pension when they split, the other spouse will be the survivor beneficiary. That can't be changed," Anderson said.
Fit the financial plan to the family
It may even be a good strategy to wait to separate until the partner is drawing a pension, because otherwise the money withdrawn from the pension must go into a locked-in RRSP. That means losing the protection of an administered pension and having to pay fees to manage the money, she said.
"Some of these teachers' pensions are up around $1 million. It's a huge asset to divide up."
Every divorce or separation is different and there is no perfect way to divide assets, but getting financial advice during the process can make the transition smoother, Anderson said.
Unlike divorce lawyers, financial planners can work with both parties to explore the tax and long-term implications of the way they divide assets. Often there is an education process involved.
"The way couples split tasks, often there is one that takes on the family finances. After they split, there can be a real imbalance in knowledge of their financial situation," Anderson said.
"The world is falling apart and you've still got to work and pay the bills and manage your life and you're making decisions that will impact you for the rest of your life."