If you are married and are participating in a traditional pension plan (also known as a defined benefit plan), your benefits are normally paid in the form of a “qualified joint and survivor annuity” (QJSA). A QJSA is an annuity that pays a dollar amount (usually monthly) to you while you are alive, with at least 50% of that amount continuing to your spouse after your death, if your spouse survives you.
However, if you and your spouse consent in writing, you can waive the QJSA and elect instead to receive a single-life annuity. With a single-life annuity, payments are made over your lifetime but stop upon your death. For example, if you receive just one payment after retirement and then die, the single-life annuity would end, and the plan would make no further payments.
So why would you agree to waive the QJSA in favor of a single-life annuity, knowing that payments will stop at you death? The main reason is that the single-life annuity generally pays a significantly larger pension benefit than the QJSA. That’s because the payments are designed to last for a smaller number of years—one lifetime instead of two. Pension plan participants who want to maximize their monthly retirement income are often tempted to choose the single-life annuity for this reason. However, most pensioners are also concerned about providing for their spouses if they should die first.
“Pension maximization” is one technique for solving this dilemma. The way it works is that you elect, with your spouse’s consent, to waive the QJSA and receive your pension benefit instead as a single-life annuity. You then use the additional pension income to purchase insurance on your life, with your spouse named as beneficiary. If you should die first, the pension payments will stop, but your spouse will receive the life insurance death proceeds free from federal income taxes. The idea is that by coupling the larger pension payments with the purchase of a life insurance policy on your life, you may be able to increase your total income during retirement, while also providing for your spouse’s financial future should you pass away first.
Is Pension Maximization Right for You?
There are a number of factors to consider. Are you insurable? If not, pension maximization is not a viable strategy. How much will the life insurance cost? If you are relatively young and in good health, the insurance premiums may be much more affordable than if you are older and/or in poor health. How much more does the single-life annuity pay than the QJSA? The larger the benefits under the single-life annuity, the more income you’ll have to pay the premiums for the life insurance policy. Also make sure to factor in any cost-of-living adjustment the pension plan may provide when analyzing your payment options. How healthy are you, and what is your life expectancy? What are the tax consequences? Death benefits from life insurance are free from federal income tax, while pension benefits are typically fully taxable. If you die first, can your spouse manage a large lump-sum payment?
The pension maximization technique is not for everyone, but could be worth considering as you and your spouse evaluate your pension benefit options.
Note: Any guarantees associated with payment of death benefits, income options, or rates of return are based on the claims-paying ability of the insurer. Policy loans and withdrawals will reduce the policy’s cash value and death benefit.
At Henssler Financial we believe you should Live Ready, which includes exploring the options to make the most out of your retirement funds while providing for your family should you die. If you have questions regarding pension maximization, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.
Disclosures
The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
