WHAT IS 'Pension Option'

Pension option refers to one of a series of choices that a pensioner must make as they approach retirement. These decisions determine where the cash pension payouts will go in the short term and how payments will be structured.

BREAKING DOWN 'Pension Option'

Pension option describes one of several options that a retiring employee must consider with regard to their pension assets. The options center on where the cash proceeds from the pensioner’s account will go, and how payouts to the pensioner will be structured.

The most consequential decision that many retiring employees face is whether to opt for a series of monthly payments from their pension or one lump-sum distribution at retirement.

Monthly payment pension option - pros and cons

The great advantage of receiving monthly distributions from a pension annuity lies in the predictability of these payments. Payments are guaranteed at a set amount until the death of the retiree. All investment risk is held by the pension plan, and payments are generally guaranteed by the Pension Benefit Guaranty Corporation (PBGC) in the event of the employer’s failure to meet its pension obligation.

Most plans allow for a spouse to continue receiving benefits after the employee’s death, but very few offer any benefit to beneficiaries beyond a spouse.

Lump-sum pension option - pros and cons

Typically, individuals taking the lump sum put the money into an individual retirement account (IRA) to avoid taxation and to seek further returns on their investments. By doing so, the retiree can take some control over investment choices, and upside growth is potentially significant. Loss is an option, too. It is likely that either the pensioner or the IRA balance will outlive the other. This means that the individual should have a backup resource and designated beneficiaries if a balance remains after death. IRAs offer greater flexibility in selecting beneficiaries than a pension annuity.

One common route for retirees selecting a lump sum distribution is an IRA annuity product. This functions similarly to the monthly distribution option described above, but some retirees feel that they can purchase a higher-performing annuity outside of the pension plan.

Annuity Pension Options

Retirees selecting monthly payments from a pension annuity or an IRA annuity will have to decide which type best fits their needs. A single-life annuity will provide the largest monthly payments, but these payments will end once the pensioner passes away. A joint-and-survivor annuity allows for a spouse to receive a pre-determined portion of the pension in monthly payments upon the participant’s death. Finally, a period-certain option specifies a time period over which payments will take place, and a third beneficiary can be named to receive payments if both the employee and the spouse have died.

RELATED TERMS
  1. Pensionable Service

    Pensionable Service refers to the amount of time a worker accrues ...
  2. Fully Funded

    "Fully funded" is a term that describes when a pension plan has ...
  3. Pension Protection Act of 2006 ...

    The Pension Protection Act of 2006 made several provisions from ...
  4. Statement Of Changes In Net Assets ...

    A Statement Of Changes In Net Assets Available For Pension Benefits ...
  5. Current Service Benefit

    A current service benefit is the pension benefit earned by an ...
  6. Integrated Pension Plan

    An integrated pension plan uses a participant's Social Security ...
Related Articles
  1. Managing Wealth

    How Pensions, Social Security Differ

    Both pensions and Social Security provide an income stream to retirees, but they differ widely on how they're structured and funded. Here's the lowdown.
  2. Retirement

    New 401(k) Pension Rollover Rule: Pros and Cons

    Is the new rule allowing participants to roll their 401(k) balances into pensions a good idea?
  3. Financial Advisor

    Pension Options: Payout vs. Payments

    If you are entitled to a pension you have financial decisions to navigate. Here are some considerations that can help you determine which option is best.
  4. Retirement

    7 Signs Your Pension Fund Is In Trouble

    Even if you're lucky enough to have a pension plan, you can't assume it'll pay out.
  5. Managing Wealth

    Getting Divorced? Protect Your Pension

    If you are parting ways with your spouse, gaining an understanding of your pension benefits can help ensure your retirement isn't compromised.
  6. Retirement

    Should You Accept A Pension Buyout?

    Pension buyout offers are all the rage among corporations wanting to reduce their corporate pension liability. But are they a good deal for the investor?
  7. Retirement

    Lifetime Income or Lump Sum Payment: Which Is Best?

    If your pension is being eliminated, should you take the lump sum or lifetime income option?
  8. Retirement

    The Investing Risk Of Underfunded Pension Plans

    Determine the risk to a company's EPS and financial condition resulting from an underfunded pension plan.
  9. Retirement

    Pension Payout Options: What You Need To Know

    Here's what needs to be considered if you have the option of either taking a lump sum payout or a monthly benefit from your pension.
  10. Retirement

    A Primer On Defined-Benefit Pension Plans

    Most of us will rely on a pension plan in the future, so it's best to know the details of the various plans before signing up.
RELATED FAQS
  1. Can I leave my pension to my spouse when I pass away?

    In most cases, an individual with a pension plan should have the option to leave at least a portion of his or her pension ... Read Answer >>
Hot Definitions
  1. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  2. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  3. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  4. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  5. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  6. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
Trading Center