Di­vi­sion of pen­sion rights

Could this option be suitable for you?

The unequal position of cohabiting partners regarding pension rights has been somewhat in discussion. Icelandic pension legislation includes an equalisation mechanism that allows spouses or cohabiting partners to divide pension rights or pension payments by mutual agreement. However, several factors must be considered when assessing whether such a division is appropriate, and it cannot be assumed that this is always the right solution.

If pension rights are divided, the arrangement applies only to retirement pension rights of individuals who are or have been married or in a registered cohabiting partnership, and only to rights accrued during that period. The division must be reciprocal, equal and cover all pension funds in which both partners hold entitlements. Statutory conditions relating to health and age apply to the division of accrued rights, and this option should therefore be considered in good time. Legal requirements regarding health and age apply to the division of accrued rights, and this option should therefore be considered in good time.

Division of pension rights

There are two possible approaches when it comes to the division of pension rights: division of accrued rights and division of future rights. These options are most commonly used where there is a significant difference in pension rights and spousal benefits in the pension fund of the person with higher rights are minimal. If a fund member and their spouse choose this route, up to half of the pension rights accumulated during the period of cohabitation or marriage may be divided, or future contributions paid into the pension fund may be split so that separate rights accrue for each partner. The spouse thereby acquires an independent retirement pension entitlement amounting to up to half of the fund member’s retirement pension rights. However, survivor’s pension and disability pension rights are not divided. It is also possible to combine both approaches, dividing both accrued rights and the rights that will be built up during the remaining working years of the fund member.

It should be kept in mind that this measure is intended to equalize the overall position of pension rights between spouses, not to make the spouse's rights higher than the fund member's. In funds where spousal pension rights are lifelong, the pros and cons of division need to be considered especially carefully. If the fund member's rights lie almost exclusively in such a fund and the spouse has little or no retirement rights, such a division could result in the spouse ending up with higher rights than the fund member, as they now own half of the fund member's retirement rights along with full rights to spousal pension. The member, however, would no longer have any survivor’s pension rights and would have transferred half of their own retirement pension rights to the partner.

Division of pension payments

If this approach is chosen, it only involves dividing the pension payments, i.e., after retirement has begun. Upon the death of the fund member, payments to the spouse cease, but spousal pension payments then take over. Upon the death of the spouse, however, the fund member receives all their pension again. This approach is taken, for example, if the fund member and spouse can no longer maintain a home together due to health issues in later years or for the purpose of equalizing tax burden.

So what is the right course of action?

Retirement pension rights, as well as entitlement to a survivor’s pension, vary between pension funds. Most of us have accumulated rights in several funds throughout our lives, so it is crucial to understand all rights before making a decision about division. After that, the first question to consider is how long both the fund member and their spouse are likely to live. Fortunately, none of us knows the answer to that question, nor do we know with certainty how our later years will be, whether we will be able to live at home in the final stage of life or whether we will need nursing home services at some point. A decision to divide pension rights must therefore inevitably be based on some form of assessment of what the future may hold. If both parties wish to proceed with such a division, it is also necessary to consider which of the three options discussed here is most suitable.

Further information is available on the website of the Icelandic Pension Funds Association, lifeyrismal.is, or on the website of your own pension fund.