Getting the Most Out of Your Pension

Posted by on October 12, 2009 · Leave a Comment 

If you or your spouse is eligible to receive a pension, it will figure prominently in your retirement planning. However, pension laws are complicated, so it is important to learn the facts about your company’s pension plan to make sure that you obtain the benefits to which you are entitled.

There are two basic types of pension plans: A defined benefit plan typically is funded entirely by the company and provides designated benefits; such benefits often are stated as a percentage of pre-retirement pay. A defined contribution plan usually is funded by a combination of employer and employee contributions. Your benefits will be based on the sum of the contributions themselves and the income earned by the invested contributions over the years.

Questions to Ask

If you are covered under a pension plan, there are some general questions you should ask the employee benefits specialist at your place of employment:

  • What are the eligibility requirements? Most defined benefit pension plans require employees to meet age and service requirements before they are permitted to become plan participants.
  • When do your benefits become vested? In other words, when do your benefits belong to you whether or not you keep working for the same employer, are laid off, or are fired?
  • How is the amount of your pension calculated? When can you begin to receive benefits? Will those benefits ever increase once they begin?
  • What are the payment options? Will you have the option of electing a lump-sum payment instead of monthly benefits?
  • Will your dependents be protected after your death? Or, will you be protected if your spouse dies first?
  • How much money can you expect to receive? Is that amount “integrated” with Social Security benefits? (“Integration” refers to a practice whereby employers may reduce the amount of pension benefits workers may receive by a percentage of their Social Security benefits.)
  • When can you retire under the plan? How will your pension be affected if you retire early or continue working past age 65?
  • What happens to your pension benefits if you leave your job for a period of time to return to school, have a baby, care for an elderly relative, or for another reason?

Decisions to Make

You typically have three decisions to make when it comes to your pension. They involve:

  1. Dependent protection. If you are vested, a joint and survivor annuity, with regular payments made to your spouse after your death, is automatic under pension law. If you and your spouse both agree, in writing, to forego this option, you can choose another option under your employer’s plan. One such option might be a life annuity, ending at your death. Although a life annuity will provide larger monthly payments than a joint and survivor annuity, election of this option may mean that you are gambling on outliving your spouse…or on his or her ability to survive economically without either you or your pension.
  2. Lump-sum or monthly payments. You may have a choice, at retirement, between regular monthly payments and a lump-sum payout of your pension benefit.
  3. Tax treatment. How you receive your pension funds affects the amount of tax that will be due. If you receive your pension in monthly installments, those installments (except for your own contributions) are taxable. If you receive a lump sum, you may be entitled to a special five-year averaging provision. Please consult your own tax advisor for specific tax advice.

Finally, as you begin to evaluate your pension coverage and consider other financial options in planning for your retirement years, do not forget to take advantage of the information you can receive from your insurance agent.

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