If you’re in the final weeks or months of your working career before retirement, you’ve likely begun to pore over your pension options from your employer. This is often a confusing and daunting task given the plethora of choices available! “Joint, 2/3 to Survivor with a 10 Year Guarantee” versus a “Single Life with no Guarantee” requires a financial planning background just to decipher, let alone decide. Today I hope to demystify the basics of pension plan options to make reading them a little easier to understand and enable a more informed decision.
“Single Life” vs “Joint”: This is the most basic starting point in understanding how a pension payment is structured and likely the most important! A Single Life pension means the pension payment will be made for the duration of your life and, when you die, the payments will stop. Whether you’re retired for one month or 40 years, the payment will last as long as you do. A Joint payment on the other hand means the pension provider is on the hook to make payments until both you and your spouse have passed away. Given the potential for a shorter payout duration on a Single individual, these payments are typically higher than Joint plans.
“Percentage to Survivor”: This is only applicable to Joint payment options and dictates “how much” the pension provider will pay after the first death. This can be constructed a number of different ways, from a reduction only when the pension member passes away to a reduction when either the member or spouse passes away. It can be 100% to the survivor, 2/3, 60%, 50% or just about any other split. As an example, assume a Joint, 60% to Survivor on Member’s Death payout that starts at $3,000/month. When the plan member passes away, his or her spouse will continue to receive $1,800/month (60% of $3,000) for the remainder of their lifetime. As a rule of thumb, the higher the percentage paid out to a survivor, the lower the pension payment will be.
“Guarantee Period”: Another estate planning piece, the guarantee period is a minimum number of years the pension will pay out regardless of death date(s) of the pensioner(s). If you elect a 10 year guarantee and pass away in year six, there will be four more years worth of payments made to your beneficiary. If you elect a 10 year guarantee and pass away in year 11, no more payments will be made as you’ve outlived the guarantee. These guarantees are typically offered in five year increments and eligible on Single Life or Joint payment options.The shorter the guarantee period, the higher the initial
pension payment will be.
“Commute The Lump Sum”: rather than choose a pre-planned pension option, most pensions allow members to convert their income stream to a lump sum (called the “commuted value”) and self-manage their funds. This likely results in a combination of locked-in registered, un-locked registered, and some non-registered money being created. The plan member can then design an income stream, subject to jurisdictional regulations, with the funds available. This is a complex decision that should not be made lightly, with many pros and cons.
There you have it – those components dictate how your pension will be paid to you, your spouse and potentially your heirs. Deciding how you want your pension to be paid for the rest of your years (and beyond) is a tough one. With a little guidance and plenty of thought, you can make the right decision for your family!
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