Generally, the provisions in a retirement plan document determine the asset distribution options available to beneficiaries. Pension death benefits vary depending on the type of pension you have.

What is a Pension?

Pension plans are a type of retirement plan that requires an employer to make contributions to a pool of funds set aside for a worker's future benefit. The pool of funds is invested on the employee's behalf, and the earnings on the investments generate income to the worker upon retirement. Pension plan options typically offer a lump-sum distribution or payments in the form of an annuity.

Types of Pensions

There are two main types of pension plans: defined-benefit and defined-contribution.

  • A defined-benefit plan is what people normally think of as a "pension." It is an employer-sponsored retirement plan in which employee benefits are computed using a formula that considers several factors, such as length of employment and salary history. It is called "defined benefit" because employees and employers know the formula for calculating retirement benefits ahead of time, and they use it to set the benefit paid out. The employer typically funds the plan by contributing a regular amount, usually a percentage of the employee's pay, into a tax-deferred account. Depending on the plan, employees may also make contributions.
  • A defined-contribution plan is a retirement plan that's typically tax-deferred, like a 401(k) or a 403(b), in which employees contribute a fixed amount or a percentage of their paychecks to an account that is intended to fund their retirements. The sponsor company will, at times match a portion of employee contributions as an added benefit. These plans place restrictions that control when and how each employee can withdraw from these accounts without penalties.

Can a Beneficiary Receive Pension Plan Benefits When the Member Is Deceased?

It depends on the plan options originally selected by the member, as well as your relationship to that member. Typically, pension plans allow for only the member—or the member and their surviving spouse—to receive benefit payments. However, in limited instances, some may allow for a non-spouse beneficiary, such as a child.

According to the Internal Revenue Service (IRS): The Employee Retirement Income Security Act of 1974 (ERISA) "protects surviving spouses of deceased participants who had earned a vested pension benefit before their death. The nature of the protection depends on the type of plan and whether the participant dies before or after payment of the pension benefit is scheduled to begin, otherwise known as the annuity starting date. The summary plan description will tell you the type of plan involved and whether survivor annuities or other death benefits are provided under the plan.

"When a plan participant dies, the surviving spouse should contact the deceased spouse’s employer or the plan’s administrator to make a claim for any available benefits. The plan will likely request a copy of the death certificate. Depending upon the type of plan, and whether the participant died before or after retirement payments had started, the plan will notify the surviving spouse as to:

  • the amount and form of benefits (in other words, lump sum or installment payments under an annuity);
  • whether death benefit payments from the plan may be rolled over into another retirement plan; and
  • if a rollover is possible, the method and time period in which the rollover must be made."

If the plan member is married with a joint-life payout option, the default beneficiary is automatically the member's spouse unless the spouse waives that option. The spouse would need to certify in writing via a spousal consent or spousal waiver form that they are choosing not to receive survivor benefits. It may need to be notarized. If done properly, this allows the member to designate another beneficiary, such as a child. If the plan member is not married, they may designate another beneficiary.

Types of Survivor Annuity Options

Defined-Benefit Pension

With a defined-benefit plan, the main factor to consider is whether the member was retired at their death. If the member had not retired prior to death, the plan may pay out a lump sum to the designated beneficiary. This is typically worth a certain multiple of the member's salary because defined-benefit plans were designed to be linked to length of employment and salary history.

If the member had already retired, the pension payments may either end at the member's death (referred to as a single-life pension) or they may continue to pay benefits to a beneficiary in a reduced amount (referred to as a joint-life or survivor pension). If the member selected a single-life pension, his monthly payments would be higher than if they selected a joint-life pension.

Because the employer expects to have to pay benefits over a longer period of time, the joint-life option often comes with reduced payments to both the member during his life and the surviving beneficiary. There may be other hybrid options available as well that continue to pay higher payments to the member until his death (although not as high as single-life option), with a drastically reduced payment to the surviving beneficiary.

Defined-Contribution Pension

With a defined-contribution plan, such as a 401(k), the beneficiary can access remaining funds in the retirement account via a gradual drawdown, lump sum payment, or through the purchase of an annuity. Read this article for more information about the intricacies of inheriting a 401(k). As mentioned above, if a married plan member wishes to designate a beneficiary other than the member's spouse, the spouse must waive rights to the retirement benefits.

Period Certain Annuity

A period certain annuity option allows the customer to choose how long to receive payments. This method allows beneficiaries to later receive the benefit if the period has not expired at the date of the member's death. This is unlike the more conventional single-life annuity option, in which the annuitant receives an income payment for the rest of his or her life, regardless of how long their retirement lasts.

Advisor Insight

Gage DeYoung, CFP®
Prudent Wealthcare LLC, Aurora, CO

Assuming your parent elected a period certain pension option for payment at retirement and named you as beneficiaries, you and your siblings would be entitled to the continuing payments until the period expires.

For example, if a parent elected a 20-year period certain pension option and passed away after 10 years from the date the pension started paying, his beneficiaries would be entitled to split the monthly payment for the next 10 years.

It will be important to find out what election was made by your parent prior to the payment start date. Many corporate pensions only offer single-life or joint-life payment options.

If that’s the case, the payments, unfortunately, stop at the passing of the original payee—or the passing of the original payee and their spouse, with a joint-life option.

The Bottom Line

Whether you can inherit pension benefit payments from a parent depends highly on the specific plan options originally selected by your parent. The tax treatments and methods available to you to access these funds vary based on those selections, as well. To be sure of the options available to you, check with your parent's employer or the administrator of your parent’s defined-benefit plan. As always, speak to a tax professional to fully understand the tax consequences of any inherited pension benefits.