Pensions are quickly becoming a thing of the past, but if you are lucky enough work for an employer that still offers one you will face a major choice at retirement. You will be given several options for your income payments when you retire.
Since pensions are usually annuities set up for the retiree by their company these payment options are the same as annuity income payment options. Generally you have five major options.
Lump Sum
When you retire you have the ability to take a lump sum distribution of your pension funds. When your annuity is in its surrender period, when you are no longer penalized for taking the funds, you may also take a lump sum distribution of your money without penalty (assuming that you are over age 59 ).
While this may sound like an attractive option one of the most important benefits of an annuity is the ability to turn it into an income stream for life. Taking a lump sum will result in a large tax liability and deny you income that may help supplement Social Security and other retirement savings.
Life Only
Among lifetime income payment options this is one of the most often chosen, and one of the least understood. When looking at the payout options of your pension this income amount will likely be the largest.
Many people see the largest income payments with this option and chose it without a second thought.
This option means that the income payments will cease upon the pensioner’s death. If you have a spouse or other dependent that may need to live on your pension this option will ensure that they do not receive any money upon your passing.
Too often people chose this option without taking into consideration the situation that they will leave their loved ones in when they pass.
Life With Period Certain
This option provides only fractionally less than the life only option but adds the benefit of guaranteeing payments for a certain period of time. This allows for payments for life or payments for a specific period, whichever is longer.
In the event of your death the pension or annuity payments will continue until a pre-determined time. If you outlive the predetermined time the payments will still continue until your death but cease thereafter.
Survivor
In an annuity you may chose this option for either a joint owner or a beneficiary. In a pension you have this option for your beneficiary.
In the event of your death a portion of your income payment will continue to your joint owner/beneficiary. This option will usually pay out a few dollars less a month than a life only option, but will ensure that your loved one will continue to receive income when you pass.
If your beneficiary passed before you, you may not choose a new beneficiary. Payments will continue until your death and then cease.
Life With Cash Refund
The final option that you have is a life with cash refund. Remember that lump sum option? The income that an annuity provides represents a partial return of that lump sum and interest.
That means that with each income payment that lump sum is slowly decreasing. With this option in the event of your death any amount still not distributed from that lump sum of money will be passed on to your beneficiary.
The longer you live and receive income the smaller the amount left to pass on to your beneficiary. After so long you may have nothing left to pass, although your income will never cease.
Annuities and pensions are designed to provide income for life. Being aware of your income options will allow you make a wise and responsible decision for you and your loved ones. There 5 options are not all inclusive, pensions and annuities vary. Of course, make sure to consult your human resources team and/or agent before making a decision.