Which Pension Is Best for Couples?

If you are vested in a defined benefit pension plan, you have a critical choice to make. Specifically, you need to determine how you’ll receive your pension benefit. For married couples, the payout option you choose can affect how much income continues to a surviving spouse for decades.

Two factors make this pension decision weighty. Your benefit election may shape a large share of your retirement cash flow, and most plans don’t allow changes after benefits start. The choice of pension payout options isn’t clear-cut, and it can have far-reaching consequences for you and your family. That’s the reason why your choice needs to be based on your financial plan. Your decision should consider several key factors, such as your and your spouse’s age, health, income needs, and income sources.

Looking at Your Pension Plan Distribution Options

Pension plans typically offer a lump-sum payout, a monthly benefit, or both. The monthly payout is an annuity option that can be paid on a single life, a 50 percent payout for joint and survivor, 100 percent joint and survivor (there could be several variations of the joint and survivor options), and life with 10 years certain.

Couples need to take their spouses into account when they make this decision. These retirement benefits are generally counted on for long-term support for both partners after exiting the workforce. Here’s a closer look at each pension payout option.

Lump-Sum Option

The lump-sum payout option is a one-time payment, as Investopedia explains. The payment is generally calculated using the present value of the monthly payments you would otherwise receive. The specific formula varies by plan, so review your plan documents carefully. Generally, the formula applies a discount rate tied to the 30-year Treasury note.

You can invest your lump sum payment in any way you choose. However, unless you roll it into an IRA, the entire amount will be counted as ordinary income in the year it’s received and taxed accordingly.

If you roll your lump-sum pension payment into an IRA, taxes are deferred until you withdraw the funds. Withdrawals before age 59½ may be subject to income taxes and a 10% early withdrawal penalty, depending on your circumstances and applicable exceptions.

When a Lump-Sum option may be worth discussing

There are several reasons why you might choose a lump-sum payment option. While it doesn’t provide the consistency of long-term income, it can even be the best pension payout option for couples in certain circumstances.

Here are a few scenarios where a lump sum may be worth evaluating for your pension payout for both individuals and couples:

• If facing health concerns, some may prefer the flexibility of a lump-sum payout instead of lifetime monthly payments.
• If you’re not married, a lump-sum payment would also provide you with more flexibility in determining how to pass the remainder to a family member or charity.
• If you’re comfortable taking investment risk and managing the assets yourself or with professional guidance
• If you, or you and your spouse, don’t need the monthly income and would rather control the pace of withdrawals yourself.
• If you want to evaluate the financial strength of the pension plan and understand what protections may or may not apply.

These may be valid considerations, depending on your broader financial plan. However, remember that you bear the risk that your investments may underperform. A lump-sum payout puts the investment decisions in your hands instead of the pension provider’s.

Annuity Payout Options

Annuity payout options may provide a more consistent income stream for couples, depending on the terms of the plan. However, the joint and survivor pension payout options are among the most important for married couples to consider. And, as outlined above, a lump-sum distribution can make more sense in certain situations.

To begin making this choice, it’s important to understand how your pension payout is calculated. Your monthly pension benefit is calculated based on your earnings and years of service.

For illustration only, some plans calculate benefits using a percentage of average earnings multiplied by years of service. Your actual formula will depend on your plan. However, your actual monthly benefit amount will be shaped by the annuity option you choose.

Single Life Annuity

The single life annuity option generally provides a fixed monthly payout for life, subject to the terms and financial backing of the pension plan. Comparing a single life annuity vs. a joint survivor annuity starts here: the single life option generates the largest monthly payout, but payments stop at your death. Once you die, the pension goes away.

Situations Where a Single-Life Annuity Might Fit

This choice is relatively clear-cut if you are single with no dependents. There’s simply no need to consider the joint and survivor options when they aren’t applicable to you.

If you are married, understanding joint life vs joint and survivor options is frequently worth reviewing, as they may provide continuing income for a surviving spouse. However, if you have other reliable income sources that can provide for your spouse, you could choose to maximize your pension benefit with a single-life annuity.

Some couples will use a portion of the difference between a single-life payout and a joint and survivor payout to purchase a life insurance policy. That policy can provide a larger spousal benefit and more flexibility in determining how the benefit can be used.

Longevity differences may be one factor to discuss when comparing a single-life annuity with joint and survivor options. Keep in mind that if you are the first to die, the payments will stop.

50 Percent Joint and Survivor Option

The 50 percent joint and survivor pension for a married couple where one spouse depends on that income stream. For example, if the single life monthly payout is $2,800, the 50 percent joint and survivor option might be reduced to $2,300. However, at your death, your spouse will continue to receive $1,150 a month for life.

When to choose the 50 percent Joint and Survivor option

This pension distribution option may be well-suited for couples in which one spouse relies heavily on the pension for ongoing income. It may not be an appropriate payout option for every couple, but it’s a common alternative couples can evaluate together. It’s especially appropriate if you are the older spouse or if your spouse is in better health than you.

100 Percent Joint and Survivor Option

Instead of continuing 50 percent of the reduced pension amount to a surviving spouse, a 100 percent joint and survivor option continues the full benefit. To cover the higher survivor benefit, the pension amount paid to the pension-holder is reduced further.

A single-life payout of $2,800 might be reduced to $2,100. The upside is that your spouse won’t experience any change in income from the pension. They will continue to receive the same $2,100 monthly benefit.

When to choose the 100% Joint and Survivor option

This election generally provides a greater continuing benefit for a surviving spouse than the 50 percent joint and survivor path. This choice is worth discussing if one spouse is older or has health concerns and the surviving spouse may need continued pension income.

Life with 10 Years Certain Option

Life with 10 years may offer a higher payout than monthly amount than some joint and survivor selections, but it depends on the plan. The life with 10-years certain option makes monthly payments for life. However, if you die in the first ten years, your spouse receives the same payout for the remainder of the ten years.

When to Choose Life with 10 Years Certain Option

This selection may be worth discussing when age differences or health considerations affect how long survivor benefits may be needed. It’s an important option to keep in mind if those scenarios apply to you. However, it has clear downsides when your partner is relatively young and in good health.

Pension Payout Options: An Important Income Retirement Income Decision

Your pension benefit is likely a major cornerstone of your retirement income plan, and you may only have one opportunity to make an election.

That means you have a single opportunity to choose your pension payout option, and it requires you to weigh several unknowns about the future. While no one can be certain about what the future holds, it is possible to consider what’s likely to happen.

So, determining which pension payout is best for couples means carefully weighing your cash flow needs alongside each spouse’s age and health circumstances.

Lump-Sum Benefit Option

As you make your choice about which pension payout option is best for you and your spouse as a couple, it can help to see the pros and cons for each listed succinctly. Use the following lists as a general educational reference before discussing your options with a qualified, fiduciary professional.

Pros of Lump-Sum Pension Payouts

• You can control investment decisions or hire an investment manager.
• Your investments may outperform differently from the pension option, including better or worse outcomes
• Based on market performance and withdrawal decisions, invested assets could increase or decrease over time, affecting what remains for your heirs.
• You potentially have more control over the assets rather than relying solely on future pension payments.

Cons

• You are responsible for creating sufficient lifetime income — you lose the security of a long-term, guaranteed pension payout.
• Investment choices or poor market conditions could threaten your financial security and how long your assets support your retirement income needs.
• If you fail to roll your lump-sum proceeds directly into an IRA, the entire amount could be taxed at your ordinary income tax rate.
• Any withdrawals you make from an IRA rollover before age 59 ½ are subject to taxes and a 10 percent penalty.

Long-Term Pension Benefit Options

Pros

• You are likely to receive a monthly income you can’t outlive. subject to the terms and financial backing of your pension plan.
• For a reduced benefit amount, your spouse can receive a lifetime spousal benefit after you die.
• You have several options for selecting a distribution, which can make it easier to find the best pension for couples based on your specific income needs.

Cons

• You do not have control over investment decisions and may have to adjust your budget to align with your pension payout.
• Typically, the benefit amount does not include inflation protection, which means you risk the loss of purchasing power.
• The strength of the pension plan and any applicable PBGC protections are valuable factors to understand.

Your pension benefit is the culmination of years of hard work. Your most difficult decision – choosing the best pension payout option for you and your spouse – still lies ahead.

You only get one chance to check the right box because there’s no going back once you receive a payment. It’s important to know your options.

More importantly, it is essential first to understand your circumstances and all the critical factors that will inform your decision. A retirement income advisor can assist in evaluating your choices in light of your broader financial picture.

Ultimately, you and your partner can work toward a pension payout decision that reflects your income needs, risk tolerance, and long-term financial plan.

Talk to an Advisor