What Is a Pop-Up Option?
A pop-up option is a joint and survivor annuity or pension option, generally limited to married couples, that is triggered if the annuitant or pension plan member's spouse predeceases the plan member. The pop-up option then boosts the plan member's pension after the spouse's death.
The increase in the pension amount is made possible by the fact that the pension plan no longer has to provide a spousal pension once the plan member passes away.
- A pop-up option is a clause in a joint or survivorship pension plan or annuity that increases the spousal pensioner's payments if the pension member or annuitant dies before their spouse.
- Pop-up options come with added cost, typically in lower default pension payments while they are alive.
- Pop-up funds are made available because the member or annuitant no longer requires the payment of combined spousal benefits.
How Pop-Up Options Work
This pop-up option is attractive for married retirees who depend on pension income, but this option does have a cost attached to it. All things being equal, a plan member who opts for the pop-up option will receive a smaller pension than a member who does not choose the pop-up option. Since the plan member's spouse would receive this lower pension amount if the plan member passes away first, due consideration should be given to the relative states of health of the plan member and the spouse, in addition to which a cost-benefit analysis on the merits of the pop-up option itself may be necessary.
For instance, in 2018 (the most recent information available as of Dec. 1, 2020), in the NYC Employees’ Retirement System (NYCERS) employees could elect the pop-up option. The retiree’s benefit will “pop up” to the Maximum Retirement Allowance of $20,000 in the event that the spouse or beneficiary passes away prematurely. All payments will then cease upon the retiree’s death. If a NYCERS retiree selects this method, they cannot change her or his beneficiary after the option is enforced.
Pop-Up Option and Overview of Pension Plans
Pension plans are complex financial vehicles that have a range of features, including pop-up options. Stepping back slightly, all pension plans require employers to contribute to a pool of funds set aside for their employees’ future benefit. Pension plans exist for corporations, public service organizations like the Chicago Police and Fire Department’s Pension Plan or the California State Teachers’ Retirement System, and governments like the Norwegian Sovereign Wealth Fund. (In 2018, this fund had grown to $131 billion in assets under management, although it lost $21 billion in 2020.)
The pension’s pool of funds is invested on the employee's behalf, and the earnings on these investments generate income for employees upon retirement.
Some pension plans have a voluntary investment component, in addition to an employer's required contributions.
Some employers may also elect to match a portion of the worker’s annual contributions, up to a specific percentage or dollar amount. The defined benefit pension plan is a common structure in which employee benefits are computed using a formula that considers several factors, such as length of employment and salary history.