Employees who will be receiving a pension at retirement have a difficult decision to make about how to pass their pension to heirs. Most pension recipients don’t realize they should be planning for this important selection years before they retire. The selection of the “Spousal Continuation Program” can have an immense impact on their retirement income for years to come.
A pension is a retirement system you pay into while working in order to get a monthly paycheck when you retire. The participant pays into the pension plan, which pays for current retirees, and when they enter retirement, the people working will pay into the system for them. Social security is usually defined by income and quarters paid into the system, while the pension is usually defined by an equation, which takes into account how long the employee worked and at what age they retire. Based on those two factors, a worker can get a percentage of their paycheck in retirement. Pensions are private plans funded by state or private organizations with a limited number of employees versus social security, which is a mandated federal system for all employees. Pensions are not as common these days, as they are mostly reserved for governmental employees, such as teachers, firefighters, police officers, court workers, and various other government agencies. For those who do receive a pension, they must make an important selection at retirement to continue their pension on to family if they were to pass away.
Issues can arise when clients retire and they are faced with a decision of taking a member only benefit of their calculation or taking a reduced spousal continuation option benefit. The spousal continuation option is a reduced monthly benefit to ensure if the member were to pass away their spouse would continue to receive the monthly benefit. This option will decrease the pension member’s monthly income while they are living to ensure their spouse receives a paycheck in the event of their passing.
The spousal continuation option sounds like a no brainer decision to pass money on to your spouse but can come with a heavy cost for some people. As the age between the member and their spouse increases so does the monthly cost to have a spousal continuation option. If your spouse is younger than you, they charge a higher monthly deduction to ensure the benefit goes on to your spouse. If your spouse were to pass away before you, there is no refund on the money you gave up to the system. If both spouses pass away together, there is no monthly benefit that can pass on to your children or heirs.
A common problem clients face is that they want to leave their partner secure but are also concerned about the reduced benefit amount. Any money they forfeit in a reduced benefit, depending on longevity of their partner, would not be recouped by their heirs. The solution to pension spousal continuation is to plan before you get there. There are many options to consider when planning. Some of which include:
- Taking a lower spousal pension, such as a 50% option so they are not giving up as much on a monthly basis.
- Deciding to save into an investment account to help supplement their heir’s income when they pass.
- Taking out a life insurance policy with the excess amount received in a life only payout versus spousal continuation to provide a lump sum tax free benefit to their heirs.
There are many options for each client’s situation, but the most important thing is to plan early. Seeking professional guidance can help alleviate some of the stress associated with planning and help evaluate options to select a proper strategy.
This communication is for informational purposes only and does not purport to be a complete statement of all material facts related to any benefit plan, company, or industry mentioned. Performance representations should not be taken as an indication or guarantee of future performance. No representation or warranty expressed or implied, is made regarding benefit options, future performance or timeframes. The opinions expressed reflect our judgment now and are subject to change without notice and may or may not be updated. FSC.2024.65
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This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The content of this document is made available on an “as is” basis, without warranty of any kind. The Baldwin Insurance Group Holdings, LLC (“The Baldwin Group”), its affiliates, and subsidiaries do not guarantee that this information is, or can be relied on for, compliance with any law or regulation, assurance against preventable losses, or freedom from legal liability. This publication is not intended to be legal, underwriting, or any other type of professional advice. The Baldwin Group does not guarantee any particular outcome and makes no commitment to update any information herein or remove any items that are no longer accurate or complete. Furthermore, The Baldwin Group does not assume any liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. Persons requiring advice should always consult an independent adviser.
