Pension Maximization

QUESTION: MY RETIREMENT PLAN OFFERS SEVERAL OPTIONS FOR THE

PAYOUT OF MY PENSION. WHEN I RETIRE, WHICH OPTION SHOULD I TAKE?

Answer: It depends on what options your plan offers, whether you are married at the time of retirement, and what your retirement goals are. Even if you are married, a Joint and Survivor Annuity may not be the best way to care for your spouse should (s)he outlive you.

A life insurance strategy called “pension maximization” or sometimes “pension enhancement,” may provide a more attractive overall benefit package for married couples than the normal Joint and Survivor (J&S) annuity option from a qualified plan. The concept is simple: rather than electing to receive the normal default J&S annuity from a pension plan, the retiring participant, (with the consent of his or her spouse), selects the higher benefit payable under the Single Life (SL) annuity option. The couple then purchases life insurance on the participant to ensure the financial security of the spouse in the event the participant dies first and pension benefits cease. The difference between the pension benefit payable under the SL annuity and the lower joint benefit payable under the J&S annuity is then used to pay premiums on the insurance.

A fundamental but often misunderstood concept is that a J&S annuity is a type of insurance. Whenever a couple selects some form of J&S annuity, rather than the SL annuity, they are essentially buying insurance to ensure survivor benefits for the spouse. The “premiums” they pay for this protection are equal to the difference between the benefit payable under the SL annuity and the joint benefit payable under the J&S annuity.

For example, if the pension would pay $3,000 a month under the SL annuity option, but only $2,550 under the normal benefit and 50% survivor annuity option (which will then pay the surviving spouse $1,275 per month after the death of the plan participant spouse), the couple is effectively paying a $450 monthly premium to ensure that the spouse will be paid $1,275 per month (50% of the $2,550 joint benefit) in the event the plan participant dies first.

A couple can use the basic strategy of a Joint and Survivor annuity to maximize their pension benefits during the lifetime of the participant and still ensure the financial security of the surviving spouse if participant dies first and pension benefits cease. By using the difference in the benefit amounts to purchase life insurance, the spouse can replace the value of the pension income. The life insurance proceeds may be tax-free instead of fully taxable like the pension amounts!*

*Death benefit payments are generally income tax-free.