THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: MONDAY, June 6, 1994 TAG: 9406040156
SECTION: BUSINESS WEEKLY PAGE: 7 EDITION: FINAL
SOURCE: Stephen Halliday
DATELINE: 940606 LENGTH: Medium
He showed me his corporate pension benefits statement, the summary of the benefits he will be entitled to upon retirement. Em-ployees of companies with qualified pension plans may request these statements once a year.
{REST} The dollar amount on the pension statement reflected a rather healthy amount. He was a bit startled, however, when I pointed out that he may not receive that amount as his pension. That's because the amount on the statement represented the figure that would be paid to him as a single or straight life annuity.
What the statement didn't say was that, because he was married, he would be entitled to that amount only if his wife formally signed off from it. Only with her written and notarized agreement would he be entitled to receive the pension just for his life, with the monthly benefits terminating on his death.
He said that he wouldn't do that and would want the payments to continue for as long as his wife lived. I explained that the pension could be reduced significantly under a joint and survivor annuity.
I recount this story to demonstrate that many savvy business executives don't understand their companies' pension statements or their options at retirement. Here are some basics.
If you are covered by a company pension plan, you've several important decisions to make at retirement time. As always, there will be tax impacts, but you'll also face decisions concerning large amounts of money. Among them, what's the best way to take your pension benefits? The options you have under your plan may vary.
Perhaps the most common way to take your retirement distribution is as an annuity, which is a stream of income generally for life. Your monthly benefit will depend on several factors, including the type of annuity selected, the amount in your retirement account, your age and the number of lives covered by the annuity.
The last factor is important because if the annuity covers both you and your spouse, the amount of the benefit depends on both of your ages. Other factors that can affect the annuity include the interest rate assumptions and any minimum guarantees offered.
The most common types of annuities include:
Straight life annuity - monthly payments for your lifetime with no further benefit paid to any beneficiary. This may be the ideal choice for someone who wants to maximize monthly benefits while guaranteeing a lifetime income. In general, if you aren't concerned about providing retirement income to a spouse or other dependents, this is an attractive option.
Life annuity with guaranteed payments - monthly payments during your lifetime with an agreed-upon minimum amount of payments, say for five or 10 years, or an equivalent lump-sum paid to a beneficiary. The longer the guaranteed payment period, the lower the monthly benefits.
Joint and survivor annuity - monthly payments to you and your spouse or some other beneficiary while either is alive. If you die first, the payment amount generally can be the same amount paid while you were both alive, two-thirds of that amount or one-half of that amount.
Some rules of thumb regarding joint and survivor annuities:
The younger the beneficiary, the lower monthly benefit.
The greater the percentage of survivor benefit, the lower the joint monthly benefit.
If you think your spouse will outlive you, the full joint and survivor annuity may be appropriate. Consider your life insurance coverage when determining if the survivor benefit is necessary. Under a so-called ``pension maximization'' strategy, it may be beneficial to select a single life annuity option and use the difference between the pension benefits to pay premiums on insurance that could provide your surviving spouse with benefits.
If you are married, there are some additional considerations regarding pension benefits. A pension equity law protects a spouse's interest in your pension plan. Unless both you and your spouse expressly waive them, your qualified plan generally must provide your spouse with a qualified pre-retirement survivor annuity, in case you die before retirement, and a qualified joint and survivor annuity.
In certain cases, you may elect to have the entire balance in your pension plan paid to you in one lump-sum distribution. Remember, if you elect to receive some form of life annuity from your plan, you are guaranteed an income for as long as you live. If you choose the lump-sum and things don't go the way you plan, you could be left with little or no retirement nest egg.
by CNB