If you’re fortunate enough to have a pension plan, you’ll eventually need to choose how to receive your benefits (e.g., evaluating if taking a lump sum is better than opting for monthly payments, with the latter known as an “annuity” or “stream payout”). Should you select monthly payments, carefully weigh the options available—especially if you’re married or have dependents. Moreover, you’ll want to ensure you make the right decision as the path you choose is irrevocable (meaning it can’t be changed).

This post will help provide you with clarity in your decision-making with respect to pension payout options.

Should I take a lump sum pension offer?

Your first decision is to determine whether an annuity (monthly payments) or lump sum (all benefits paid upfront) is more appropriate for your needs.

If you believe you can make more money investing on your own, already have sufficient sources of retirement income, or are in poor health and don’t expect to live very long, a lump sum payment may make the most sense for you. You may also find a lump sum pension appealing if you’re worried about your employer’s financial stability (particularly if your pension lies with a religious institution) or you want to protect your legacy as you can leave any remaining assets to your children or other heirs—whereas monthly pension payments cease when you or a surviving beneficiary pass away.

On the flip side, lump sum options are often least appropriate for married couples, spenders who won’t save or reinvest the money, and/or those worried about outliving their retirement savings.

As you can see, the choice is highly individualized and thereby not always clear-cut. Click here to read about the pros and cons of lump sum offers in more detail, and for the purposes of this article, let’s assume you ultimately decide to move forward with monthly payments instead.

Annuity distribution options for your pension

When reviewing the forthcoming list of typical monthly annuity pension options, keep in mind most service providers give you the ability to calculate your monthly benefit directly within their website portals—so you can view all tradeoffs in exact dollar amounts for each option.

Single-life annuities
Although this option generally provides you with the highest monthly benefit, payouts cease when you pass away as funds are only paid out to one person (you). This is often an excellent option if you’re single with no dependents.

If you’re married, however, keep in mind this option is limited as it lacks payouts for your surviving spouse; you’ll therefore need to evaluate other sources of retirement income to determine if he or she will need the money. Another reason to choose a single-life annuity is when you expect to outlive your spouse, as you’ll want to maximize your benefits.

Joint and survivor plans
Joint and survivor plans feature a benefit payment that is lower than single-life, as your spouse (or other designated beneficiary) will receive a percentage of your benefit payments for the rest of his or her life after you pass away.

The most common options in this respect allow you to select either 50, 75, or 100 percent of your benefit payment for the survivor. The larger the survivor’s benefits, the smaller your monthly payment (e.g., should you choose a 100% joint and survivor plan, your monthly payout will represent the lowest amount among all options while providing your surviving beneficiary with the highest degree of financial security).

Joint and survivor options are often best for those who are married, older than their spouse, or in poorer health than their spouse.

Term certain/period certain annuity
To help mitigate premature death risks while still receiving a higher payment than joint and survivor amounts, you can also choose a single-life annuity (either term or period certain).

With this type of contract, you are paid benefits for an established number of years (often 5, 10, or 20) rather than over your lifetime. Should you pass away before your term expires, payments continue for the duration of the term to a designated beneficiary—such as your spouse.

This option gives you the certainty of knowing exactly how many payments you and your beneficiary will receive over time. While monthly payments typically fall between single-life and joint and survivor amounts, you may be able to obtain higher monthly payments than single-life if the payment period falls short of your life expectancy. With that said, drawbacks do exist; for example, you may face a significant disadvantage if you live beyond your term and require the security of regular income.

This option is also often appropriate when the surviving beneficiary only has an income need for a specific period of time.

Annuity with accelerated payments
If you plan on retiring before you’re eligible to claim Social Security benefits at age 62, you may experience a short-term gap in your retirement income. Accelerated payments (also known as a “level income option”) help bridge this gap by initially providing you with a higher pension until your Social Security benefits kick in—at which time your pension will adjust to a lower amount. This option helps ensure pension recipients enjoy a stable income during retirement.

To illustrate this concept further, let’s assume you retire from your company at age 55 but your monthly Social Security benefits don’t take effect until age 62 (estimated at $1,500/monthly). If you’ll likely receive $4,000 a month from both your pension and Social Security, your pension would pay you this amount beginning at age 55 but drop to $2,500 at age 62.

You may also have joint and survivor options, depending on your plan; it’s important to understand how yours calculates these benefits, however, as not all pension plans are the same.

Integrating life insurance with your pension

One option married couples sometimes leverage to maximize pensions is utilizing a portion of the difference between a single-life payout and a joint and survivor payout to buy a life insurance policy.

In some cases, life insurance can provide a larger spousal benefit and greater flexibility in that your spouse would have an opportunity to pass money to heirs. With that said, this option is usually not appropriate if you’re in poor health as underwriting—which traditionally requires a medical exam—is necessary to qualify.

In sum: evaluating your pension payout options

You’ll need to consider so many factors when deciding which monthly pension payout option to choose. Looking to ensure your spouse has income during retirement? Joint and survivor plans are likely better suited for you than single-life options. As your pension is likely only one source of your retirement income, however, it’s critical to adopt a holistic view of all avenues and understand how they can work together to maximize your retirement income. This is precisely where a financial advisor can help.

Still unsure of which payout option to take? Schedule a FREE Discovery call with one of our CFP® professionals.

FAQs

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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.

Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.