Pensions
Pensions
Before marriage equality, many LGBTQ+ couples faced challenges in pension planning, with one partner often being unable to receive benefits as a surviving spouse.
For those employees with defined benefit plans, employees with same-sex partners do not have the option of selecting a Qualified Pre-Retirement Survivor Annuity (QPSA) or a Qualified Joint and Survivor Annuity (QJSA) to provide benefits to their partners in the case of their death.
Here’s The Tea: The Pain of a Pension Lost
Let's get real. Here's another true-life story regarding a pension. This involves a major auto manufacturer.
He retired. He received a single life pension. Later on, he got married legally. It was too late to go back and change the pension to a joint life payout.
I contacted this huge company, and they researched this for me. It took them a couple of weeks. But then they came back and they said, no. There's nothing that can be done.
So think about it. That meant that if that person with this huge pension just passed away, got hit by a bus, as we say, that meant that there would be nothing left for the surviving spouse, even though they got legally married.
So that is an issue for all of the people who retired with pensions before marriage equality. The one pension just disappears, and that can be a lot of income lost out of a household.
There are lump sum vs. monthly annuity income choices and beneficiary considerations to consider the pros and cons of:
Single-life annuity
- Provides the largest monthly payment, but pays only during your lifetime
- It's a poor choice if your spouse will need income from your pension to pay routine expenses
Joint-and-survivor annuity
- Pays you during your lifetime and then continues to pay your spouse or other named beneficiary
- You may be able to choose either a 100%, 75%, or 50 % joint-and-survivor annuity
Period-certain-and-life annuity
- Pays your beneficiary for a set number of years after your death
- Your monthly check will be larger than what you'd get with a joint-and-survivor annuity
- This type of annuity may be perfect for someone who is single and prefers to receive monthly pension checks, yet also wants to make sure that at least some of their wealth passes to heirs if they die young
Pension-maximization plans
- Promoted by insurance agents
- Take your pension as a single-life annuity for its higher payout and buy a life insurance policy
- Steer clear of so-called pension-maximization plans promoted by insurance agents. In this scheme, you take your pension as a single-life annuity for its higher payout and buy a life insurance policy. If you die first, your spouse invests the proceeds. The net income you both collect is supposed to be greater than the amount you would have received with a joint-and-survivor pension, even after paying for the insurance policy with after-tax dollars. But such plans can easily fall apart. You might not be able to afford an insurance policy that's large enough. Or you might pay hefty premiums for years, then let it lapse because you can no longer afford it.
Is pension maximization a good idea?
First, it can be a risky strategy, as it involves other financial products such as life insurance and possibly another fixed annuity.
You'll have to carefully evaluate each spouse's health, your cash flow, other sources of retirement income, risk tolerance, tax consequences, and more.