What is Pension Maximization

Pension maximization is a risky retirement strategy for couples that seeks to secure the best annuity payout and balance that risk with life insurance. Pension maximization involves the use of two retirement income products: a life-only annuity, which will offer the highest cash payout but will stop as soon as the pensioner dies, and life insurance, which is used to provide income to a surviving spouse. Pensioners may choose a safer joint-and-survivor annuity, which guarantees a benefit even after the pensioner dies and also to a surviving spouse as long as they live. But the higher payout of a life-only annuity can be too attractive for some couples to ignore given that the risk of such a strategy may be reduced with a life insurance policy. The reasoning is that the increased payout of the life-only annuity may provide more than enough extra income to pay the premiums of the life insurance policy, though there are many details to consider.

Breaking Down Pension Maximization

Couples who participate in an employer pension plan may consider pension maximization. Insurance agents may suggest a strategy to couples in which the pension annuitant (usually the husband) is in good health or if the couple has other source of income to balance the risk of choosing a life-only annuity structure. The longer the higher payments of such an annuity are made the more profitable it is for the couple. However, if the individual who is due the pension dies first or is expected to die first, then a joint pension or joint-and-survivor benefit may be the best choice.

Pension Maximization Reasoning

With pension maximization, if the annuitant dies first the surviving spouse will receive a death benefit from the life insurance policy that should be enough for them to be able to purchase a guaranteed fixed annuity that will have a better monthly payout than what they could get with the safer joint pension/joint-and-survivor annuity option. If the spouse that is not due the pension dies first, the other spouse cancels the life insurance policy and continues to receive the higher life-only annuity payment. It should be noted, however, that payments from the guaranteed fixed annuity would be fully taxable at the capital gains rate, while the payments from the safer joint-and-survivor annuity would be mostly tax-free. 

Pension Maximization Risks

There are many important factors to consider before attempting this strategy, including the health of both spouses, other sources of income, tax implications and the specific terms of the couple's pension or medical plan. The key to success with pension maximization is protecting the surviving spouse by providing them with a sufficient income in perpetuity. Since such a strategy can be complicated, they should be discussed with a licensed insurance professional, financial planner or financial advisor.