How Is Retirement Income Affected by Divorce?
Upon marriage breakdown, family property must be split between the separating spouses. This process is known as the Equalization of Net Family Property. Family property includes pensions and they are often a significant portion of the family’s assets.
In Ontario under the Family Law Act, automatic property sharing provisions only apply to married couples and not common-law couples. Common-law spouses who have lived together for at least one year may be able to apply under pension legislation for a division of pension but there is no automatic entitlement.
The value of pension benefits accumulated during the marriage by either spouse are subject to division, not the entire pension value. Members of pension plans in Ontario can pay their former spouse a settlement based on the value of their pension plan and can make some or all of the payments from the pension plan. Pension plan administrators are responsible for valuing the pension, pursuant to the Family Law Act and Section 67.2 of the Ontario Pension Benefits Act.
These rules only apply to married spouses but can apply to unmarried spouses if they agree to share the value of the pension following separation.
When a couple separates before retirement, the non-member spouse won’t have to wait to get a share of the pension. They can apply for an immediate transfer up to 50% of the pension’s value to another pension plan or LIRA. When a couple separates after retirement, they can apply to the pension plan administrator for a division of the pension in pay.
Spouses or common-law partners are eligible to equally split Canada Pension Plan (CPP) contributions that they made during the time they lived together. This is known as credit splitting and credits can be split even when only one of the spouses made CPP contributions. Division of credits can only occur after divorce, legal annulment or separation from a legal marriage or common-law union. Entitlement to your former spouse’s CPP credits increases with the length of your marriage and the disparity in your respective incomes. The result of credit splitting is one party’s pension could be higher at retirement than if no split had occurred and the other party’s pension could be lower than it would have been.
Either of the former spouses can request the CPP credit split. A lawyer can also make the request on your behalf. For more information please see: How To Apply For A Canadian Pension Plan Credit Split
Other Pension Plans
WSIB pensions are exempt from equalization of net family property because they are not considered property under s.4 of the Family Law Act.
RRSPs and RRIFs
Registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs) are considered family property to be equalized upon separation or divorce. The Income Tax Act allows spouses to divide benefits in these plans when they separate. The spouse receiving the share can transfer it to a registered savings or income plan and continue deferring taxes until they make withdrawals.