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< Return to Tutorial List | Skip to Next Page > Pensions and Divorce Tutorial Introduction We are presenting this "Overview of Pensions" in a conversational format that takes place at a series of meetings between a young aspiring attorney whose parents are getting divorced and a well respected senior lawyer who specializes in Divorce Law. We hope you find it to be helpful and informative. Meeting #1 Junior Associate: Thank you for taking this time to explain to me the Basics of Pensions. It will certainly help me explain to my parents how their divorce will impact their pensions. Senior Law Partner: Let's get started. The first thing we should discuss is the definition of a pension plan. A pension plan is a tax deferred savings plan. In other words, the companies your parents work for are putting money into a pension plan instead of paying your parents additional income each week. The money that they are putting into the plan accumulates tax free, and when they retire, they may withdraw the money in either a lump sum or periodically over the remainder of their lifetimes. Your parents will pay taxes on the money if, as and when it is received. The plan, by its nature, forces your parents to save money now and pay taxes on it later in life during their "golden years" when they are in a more advantageous tax bracket. Therefore, it is a tax deferred savings plan. Senior Law Partner: Question? What kind of pension plans do your parents have? Junior Associate: Answer My mother has a 401(k) Plan and my father has a regular pension that will be paid to him when he turns 65. Junior Associate: Question? What is the difference between the two plans? Senior Law Partner: Answer Your father's "regular pension" is what is called a defined benefit plan. A defined benefit plan promises that upon retirement your father will receive a defined or known monthly income for the duration of his lifetime. The monthly benefit that your father will receive will be based upon a specific formula, which can be found in the plan documents, and usually includes his years of service with the company and his salary at the time of his retirement. On the other hand, your mother's 401(k) Plan is what is called a defined contribution plan. A defined contribution plan is the type of plan in which the contributions to her plan account are known or defined. For example, 10% of her weekly salary is deposited into an account established within the plan specifically for her. The amount of money to be distributed to her upon retirement is unknown at the present time and will depend upon how effectively the contributions to her account are invested. When she retires she will receive the value of her account in a single lump sum payment. As you can see defined benefit plans and defined contribution plans are very different. The differences in the nature of these two plans cause differences in the manner in which they are valued and distributed in the case of a divorce.
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