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How divorce can destroy your retirement plans

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Few people plan for divorce, but ending a marriage after the age of 50 – a phenomenon colloquially known as “grey divorce” – can throw even the most carefully laid out retirement strategies into complete disarray.

With younger couples going through a divorce, the emphasis is usually on the legal issues that have financial implications, says Eva Sachs, a certified divorce financial analyst and Toronto-based author of When Harry Left Sally, a book on navigating grey divorce. But older couples see the reverse.

“Their concern is more on the financial planning aspect – what is all this going to mean for me if I’m giving up investment assets or retirement assets? What is this going to mean for me in terms of my overall retirement plan?” she says.

For married couples in Ontario, the law calls for an equal split between any kind of property acquired by either spouse during the marriage and still existing at separation. For instance, if the couple’s net assets were a $1 million home, $600,000 in RRSPs, and an additional $400,000 in non-registered investments, each couple would essentially walk away from the divorce with $1 million.

It sounds simple but those splitting up later in life will need to consider the tax implications, growth potential and costs of keeping or giving certain types of properties.

“It’s not the value of the asset, it’s what the actual asset is and what it means going forward,” says Sachs.

In most scenarios, the family home is the best asset as it is tax-free when sold whereas other investments like stocks or rental properties will be subject to a capital gains tax of 25 per cent. But more recently, especially within Toronto’s real estate market, Sachs says the blue sky scenario of having one partner keep the house while the other partner keeps the comparably valued RRSPs and investment assets is becoming unlikely.

Suppose the appraisers and real estate agents value your neighbour lists a comparable house at $1 million but gets $1.3 million in a bidding war, says Sachs. “The person that agreed to the price at the time isn’t going to feel that that was as balanced as they thought it was.”

It’s these sorts of scenarios that have forced divorce finances analysts to get more creative in the solutions they’re providing. 

“In one case, that was the exact scenario… they were really hesitant about what value they were going to give on the house,” says Sachs. So the spouse that wasn’t keeping the house put an agreement that said: “If it was sold for a higher price up to a certain level within a certain period of time they would share that difference.”

What’s more likely amongst grey divorces is the sale of the house will be split and then the older couple will work through dividing pensions and investment assets.

“Gifts or inheritances after the marriage don’t fall into the mix but everything else is up for division,” says Rick Peticca, an associate at Shulman Family Law.

Ontario pensions are valued by the pension administrator — an actuarial expert — then added to the value of the spouse’s property. The same goes for private or employer-sponsored pension plans. Contributions to CPP made by either spouse or common-law partner are also equally divided under a process called credit splitting.

However, if one spouse owes equalization payments as a result of a higher pension plan or larger sum ferreted away in RRSPs, Peticca says it might make sense to pay equalization using money accumulated from the matrimonial home if possible.

“As long as they’ve met their obligations under the law then it might be wiser in some cases not to touch the pension,” he explains. “You can always negotiate a settlement.”

Sachs agrees pointing out that under the law, up to 50 per cent of defined benefit pensions can be used as a division of property and transferred via a Locked-in Retirement Account (LIRA) to the other spouse.

“If that’s an option, we need to look at what the difference is going to be to (the pension holder’s) income once they retire,” she says.

When it comes to RRSPs the value is decided from the day of marriage to the day of divorce. RRSPs can be divided without having to pay fees or pull them out altogether, explains Sachs.

“The law allows us to do that without any tax implications pursuant to a separation agreement,” says the financial analyst and planner. She points out that they don’t need contribution room either to receive an RRSP from their spouse. Tax-free savings accounts are treated like cash and split 50/50.

Above all, it’s critical to be transparent about what’s up for division, says Peticca, because the financial strain can be easily eclipsed by emotional anguish if one of the partners hides assets or puts them in someone else names to keep them out of the equalization process.

“It’s important not to do anything that would undermine their own good faith (because) if it comes out that’s it,” he cautions. “Any shred of civility will just go out the window there, and it’s important to be civil in these times.”