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Pension Basics: Selecting a Form of Pension Payout

Defined benefit (DB) pension plans have a reputation for their complex formulas for determining monthly pension benefits. Unfortunately, when you retire it doesn’t get any simpler. Depending on your employer and your province of employment, employees may be presented with a number of forms of pension to choose from upon retirement.

The various forms of pension are like insurance policies: the amount you receive is based the likelihood of plan members living to a certain age. Simply put: the greater the possible liability to your employer, the less monthly pension you will receive. Here are the most common forms of pension you’ll come across along with a fictional example of how much John Smith would receive under Company ABC.

Life Only Pension, No Guarantee

This is the most common form of pension under DB plans. The major upside is that you’ll receive the highest monthly pension, however, it’s not without its downside: your pension only continues until your death. You could retire and end up living 30 years or you could prematurely die in five years.

If you’re single and your children are grown up, this form of pension may be ideal since you’ll receive the highest amount, however, if you have a spouse or dependents, this form of pension won’t provide protection for them since it will cease upon your death.

Say that John Smith would receive $2,000 per month under this option.

Lifetime Pension with a Guarantee Period

If you have dependents or want to ensure your estate receives a payout from your pension if you were to die shortly after retirement, this option may be ideal. This form of pension is similar to the life only pension: you are paid a monthly pension until your death. Usually you’ll have the option of choosing from a 5, 10 and 15 year guarantee period. If you were to pass away before the guarantee period is over, your beneficiary will receive the remainder of the monthly pension payments owed (it will be paid out either in monthly installments or as a lump sum, depending on your plan).

For example, if you were to select a lifetime pension with a 15 year guarantee and you were to pass away 10 years after retirement, your beneficiary would receive your monthly pension for the remaining five years. However, if you were to die in 20 years when the guarantee period has elapsed, there would be no further benefits payable.

In this case, John Smith would receive $1,900 under the 5 year guarantee, $1,800 under the 10 year guarantee, and $1,700 under the 15 year guarantee. Your beneficiary would receive the remaining payments if the guarantee period hasn’t elapsed.

Joint & Survivor Pension

If you have a spouse you’ll be required to elect a joint & survivor pension (unless your spouse waives his or her rights with a signed spousal waiver form). In most provinces the minimum joint & survivor pension amount is 60%. For example if you are receiving a monthly pension of $1,000 and you predecease your spouse, your spouse would continue to receive a monthly pension of $600 until his or her death. You may also be able to choose a 100% joint & survivor pension.

The form of joint & survivor pension you choose really depends on your family situation: if your spouse is receiving CPP and has his or her own pension, you may decide to go with the lower 60% joint & survivor option (or waive the option all together). A major drawback with this form of pension is that in a lot of pension plans, the spouse at your date of retirement will receive your pension no matter what (if you divorce and remarry your new spouse most likely won’t be entitled to your pension).

The 100% joint & survivor pension provides the lowest monthly pension, but provides the greatest guarantee for your spouse if you predecease him or her.  In this case, John Smith would receive $1,600 per month under the 60% joint & survivor option and $1,500 per month under the 100% joint & survivor option. If you predecease your spouse, he or she will receive your pension until his or her death.

Final thoughts

Choosing a form of pension payout is very important. You’ve worked for many years to earn your pension, so it’s important to ensure you get the greatest benefit. Unfortunately, nobody has a crystal ball – you won’t be able to predict how long you’ll live or if you’ll outlive your spouse. It’s important to sit down with your loved ones and financial advisor and decide which form of pension will provide the greatest protection for your spouse and dependents.

About the Author: Sean Cooper is a single, 20-something year old, first time home buyer located in Toronto. He has experience in the financial sector as a Pension Analyst, RESP administrator and Income Tax Preparer. He holds a Bachelor of Commerce in business management from Ryerson University.

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About the author: Sean Cooper is a single, 20-something year old, first time home buyer located in Toronto. He has experience in the financial sector as a Pension Analyst, RESP administrator and Income Tax Preparer. He holds a Bachelor of Commerce in business management from Ryerson University. You can read some of his other articles here.

{ 10 comments… add one }
  • FT FrugalTrader October 28, 2011, 10:29 am

    @ Sean, when does one choose the form of payout? Upon retirement?

  • Cherleen @ My Personal Finance Journey October 28, 2011, 10:46 am

    If I choose the Lifetime Pension with a Guarantee Period and I go for the 15-year guarantee period, I wonder what happens to my pension if I am still alive after 15 years? Does this mean I will not be receiving anything anymore? If this is the case, I see red light.

  • Kyle October 28, 2011, 1:59 pm

    A complete buyout should be discussed. Although I know OMERS just increased their withdrawal penalty quite…30% I believe. Still an option to look at. At least my family might be left with something.

  • krantcents October 28, 2011, 4:46 pm

    I elected to have a joint & survisor pension. I give up a couple hundred a month to leave my wife my pension. If she dies before I do it reverts to 100%.

  • Sean October 28, 2011, 7:50 pm

    @FrugalTrader Yes, you choose your retirement option once you terminate your employment (if you are retirement eligible).

    @Charleen Yes, you are correct Charleen. However, in some plans you can name your estate as the beneficiary. If you have dependent then this is a good option. Think about it this way – if you chose the life only pension and dropped dead a week later your pension would be over after all those years of contributing. It’s a risk vs return similar to insurance. Hope that helps.

  • SST October 29, 2011, 4:17 pm

    @Cherleen and ESPECIALLY @ Sean: NO!!!!!

    This comes STRAIGHT off my PROVINCIAL GOVERNMENT pension statement:

    “The single life pension guaranteed 15 years is payable AS LONG AS YOU LIVE. If you die before completion of 180 payments (15 years), payment will continue to your nominated beneficiary until the 180th payment has been made.”

    Cherleen — you can live for 40 years and still collect a ’15-year’ pension. However, if you die after the 15-year period, your beneficiary will collect nothing from the pension.

    Sean — please, for the sake of everyone, post ONLY CORRECT and FACTUAL information! Perhaps you mis-read Cherleen’s inquiry…

  • UltimateSmartMoney October 29, 2011, 11:22 pm

    Too many options. Not sure which one I would choose. I wonder with extra money you get with no guarantees, would it make sense to buy life insurance at that age? I’m sure it’s high but how much can you get for using the difference?

  • Steve November 1, 2011, 2:29 pm

    I’d like to see more information on DB vs DC plans. My employer recent offered a one time option to move from DB to DC. It would be interesting to see what others think would be best, especially the way the economy is going.

  • FT FrugalTrader November 1, 2011, 2:57 pm

    @Steve, that choice would differ from person to person. If you are anywhere near retirement, and your DB pension is offering 65-70% of your best five years, then a DC plan would have a very difficult time matching that.

  • papa whiskey tango April 8, 2012, 4:23 am

    Are the choices the same for defined contribution plans? I kind of want a self directed option where they give me all my money and I invest it and forced withdrawls like that, just like a RIF?

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