What Is a Pension Income Contract?
A pension income contract is an agreement between an individual and a fiduciary who promises to pay the individual money over a certain period of time. One common example involves a state-sponsored million-dollar lottery for which the winner receives the lottery earnings annually for 20 years. The state hires a fiduciary to pay the winner's prize money.
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Definition
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A pension income contract grants the contract holder the right to receive income for life during retirement. You can obtain a pension income contract either directly from a financial or insurance services company or from an employer as a benefit. Payout from a pension income contract is either fixed or variable for the life of the contract holder, and the payout amount varies based on the selection you make when you start receiving payments. For example if, at the start of your payout period, you select your spouse to receive income for 15 years after your death, then your payments are reduced in order for the pension to provide an income amount to the spouse.
Income Payout Types
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Depending on the pension income contract, you might have the option to receive a lump sum payout or a monthly payout. A lump sum payout provides you with a percentage of the value of the pension income contract upfront. You are responsible for managing it for the remainder of your retirement. A monthly payout provides you with a monthly amount for a set time period, usually for life. A registered financial adviser or certified public accountant can help you determine which payout option best suits your retirement needs.
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Monthly Payout -- Fixed or Variable
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Picking the monthly payout option might present you with another choice: a fixed or variable payout amount. A fixed payout amount provides a stable amount of income but might expose you to inflation risks. If your living expenses increase during retirement, then you will have less money for recreational purposes after paying your bills. A variable payout amount allows you to receive an amount of income that is based on the performance of an underlining product, such as stocks or bonds; the variable payout amount rises during periods of positive performance and declines during periods of negative performance.
Considerations
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Learning about a pension income contract involves finding out what company manages it, the company's financial rating, its management fees, the names of its local agents, the compensation method for its agents, the assets it manages, its business hours and contact information. A state securities and insurance commission can verify that a company is registered, and it can check for consumer complaints or violations that are on its record.
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Resources
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