Going through a divorce is usually challenging and stressful. The level of stress and emotion is exhausting, leaving very little energy to focus on the financial “chores” that need to be dealt with, so that a settlement may finally be reached.
Many must muster up the energy and time, to determine what to do with pension funds they are entitled to. That’s hard to do when you’re dealing with selling a home, taking children to therapy or attending therapy yourself!
A common scenario in divorce situations is when one spouse carries a pension through their employer and the other does not (due to self-employment, no such benefit, etc.). There is a long process by which a pension valuation is completed and the value is shared with the involved parties. This process is not the focus of this piece. What is the focus is what does someone, who may know very little about pensions; do with that money when received?
Lawyers are not financial advisors, however, they should be able to refer their client to a representative that can help them determine what to do with the funds, so that they are secured and the individual is well positioned for their future retirement.
Let’s simplify this:
- A pension remains a pension. Meaning, in most cases, you would not cash it, you would not access it (but for extreme scenarios of financial hardship) and you can’t pass it on to anyone, unless you are deceased (i.e. beneficiary).
- A pension is meant for retirement and it is protected for exactly that reason. Regulations are in place to ensure people do not see their pensions as an accessible bank account and therefore, are unable to tap into those funds. There are controls in place to ensure the pension remains true to its purpose, which is to provide additional financial security in the retirement years.
What all this means, is the funds need to be transferred to a locked-in plan, such as a LIRA (Locked-In Retirement Account). Your advisor will identify your needs, objectives and risk tolerance, and share with you the options available based on these.
A pension should always be invested in a manner that complies with regulations and in the best interest of the client. The goal is to secure the pension and see some growth, so you have more at retirement than you did at the inception of the plan.
Bottom line, pension funds are to be invested, not transferred to someone else and typically not accessed until the recipient is ready to retire. To do this, you need a well-versed representative to share options and get you feeling comfortable about what that investment can potentially do for you.
It’s not as daunting as it seems; you just need to speak with the right person, and you’ll be well on your way to using these funds for a more comfortable retirement, possibly with a partner or companion in life who you look forward to spending your retirement with!
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