Pension Options at Retirement
If your employer offers you a pension at retirement, you are given a choice as to how you want to receive that pension. Your pension was likely funded at least in part, and usually fully, by your employer. This represents "free money" for you to use to supplement your other personal savings. But, you must know about all of your pension options so that you can do what's best for you and yours.
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Full Pension Benefit
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When you receive your pension, you may elect to receive your full pension benefit. This means that you are taking 100 percent of your pension benefit as a monthly payment for the rest of your life. Because you are not leaving any money behind for your spouse, your spouse must sign a waiver for this option. When you die, your spouse receives no additional amount from your company's pension plan.
Partial Benefit
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A partial benefit option may be chosen so that you do not disinherit your spouse. Partial pension benefits normally allow you to choose a 25 or 50 percent partial benefit option. The 25 percent benefit option means that you reduce your monthly pension payments by 25 percent. You receive 75 percent of your full pension amount. The 50 percent pension option means that you receive 50 percent of your full pension amount. At your death, your spouse receives the remainder of the pension amount. This means that your spouse receives the 25 percent or 50 percent that has been set aside. This amount is paid out in monthly installments and is paid out according to guaranteed annuity payments that are based on your spouse's age. The older your spouse, the higher the pension benefit payments will be.
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Lump Sum Benefit
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A lump sum benefit amount means that you take your full pension amount as a lump sum. Instead of allowing the pension plan to manage the funds on your behalf, you manage the benefits yourself through investments that you choose. These investments may be made in any type of investment you choose. You may roll the pension amount into an IRA or you may invest outside of an IRA.
Considerations
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When deciding what to do with your pension amount, you must consider how your decision will impact you and your spouse, if you have one. If you do have a spouse, then the lump sum or partial benefit options are the only options that do not leave your spouse without any money after your death.
If you do not have a spouse to worry about, then your choice is essentially between having the pension system manage your retirement or managing it yourself. You do not necessarily have to have tremendous investment ability to manage your portfolio yourself. If you take the lump sum amount from your pension, you can use a portion of it to buy an annuity (similar to how your pension would work) to guarantee an income to you. Then, you could keep a portion of your pension savings invested in the event you need a lump sum of money in the future.
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