What You Need to Know About Pension Election

Benjamin Haas |

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Lots of baby boomers are hitting retirement age. And with retirement come some pretty big irrevocable decisions. One of which may be how to elect a pension. Not everyone has a pension. In fact, fewer and fewer people do as fewer and fewer companies offer them. But if you do have a pension and have yet to retire, you’ve got some important decisions coming. We can help.

  1. What is a pension? By definition, a pension is a defined benefit plan, as opposed to a defined contribution plan like a 401(k) or 403(b). In the simplest terms, a pension is pooled money set aside for the benefit of employees, managed by an institution, not you.
  2. How are benefits calculated? Your future benefits are typically based on certain criteria that consider your years or service or age or earnings history or any combination thereof.
  3. Lump Sum Payout vs. Life Annuity: Which benefit should I pick? One of the most important decisions, if offered, is determining whether or not you should take a lump sum buyout from a pension or instead take monthly installments.
  • If you elect an annuity, this is usually a payment for life, which means you cannot outlive the benefit. On a negative note, these benefits are not typically inflated over time, and leave you with no access to a balance – your income is your income.
  • If you elect the lump sum buyout, you will then be responsible for the management of the asset. On a positive note this means control over the investment choices, control over the withdrawals over time, both frequency and amount. On a negative note, you bore the investment risk and there is no guarantee you won’t outlive the money.
  1. Understanding Traditional Survivorship Options: Which one should I pick? If electing annuity, additional options to consider. The traditional picks are single-life annuity versus a reduced annuity payment with survivorship option.
  • “Single-life” means you will receive a pension payment for the entirety of your and only your life. No survivor payment is made. As soon as you pass, whether in year 1 of pension payments or year 25, payments cease.
  • “Joint payment with survivorship” means you take a reduced pension payment for yourself with a promise to pay for the entirety of both your life, and your survivor’s life. This typically is offered as either 100% survivorship of your benefit, or perhaps less, such as 75% or 50%. The higher the survivor benefit, the lower your pension payment while living.
  1. Understanding Other Survivorship Options. Some pensions allow you to take a payment reduction that can provide survivor benefits in other ways.
  • “Period-certain” means that you receive a pension benefit that will also guarantee a survivor benefits IF you pass away within a certain time period. A 65-year old who elects a benefit with 15-year period certain would then be providing survivor benefits until age 80.
  • A “pop-up” provision is usually attached to a survivorship option to protect the pension recipient by stipulating that if the survivor predeceases, than the pension benefit “pops-up” to a higher income, now that no survivor is listed.

Like all other parts of wealth management and financial planning, pension election is an art, not a science. Any time there are assumptions involved there can be no definitive right or wrong. What may be right for one may be wrong for another. So if forced to make a pension election decision, make a plan. Consider all the variables. Prioritize your needs and objectives. And feel free to call us.

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Securities offered through LPL Financial, Member FINRA and SIPC. Investment advice offered through U.S. Financial Advisors, a registered investment advisor. U.S. Financial Advisors and Haas Financial Group are separate entities from LPL Financial.