Pensions are becoming a rare thing in the investment world. Many companies realize the cost of maintaining these type of plans are unpredictable and risky so most are switching to 401(k) and 403(b) plans. Government and education are two industries where pensions are still prevalent. If you are one of the lucky few to still have a pension as a reward for your years of hard service then you need to understand what will happen to your pension benefits after you pass away. It’s not as simple as listing your beneficiaries. Pensions have some nuances that you need to understand in order to make sure your hard earned money gets to the people you want.
As part of a comprehensive financial plan, beneficiary designations are a relatively minor piece but should not be taken for granted. Many people often overlook how important they are because it doesn’t affect them until they pass away. But having your designations in order can save your loved ones a lot of stress and possibly a lot of money once you are gone. Let’s make sure you have them correct and are familiar with the special features of your pension.
- Non-Spousal Beneficiary - The most often used primary beneficiary is a spouse. In fact, by law you spouse is required to be the primary beneficiary unless he/she signs a waiver. So, for whatever reason you do not want your spouse as the primary you need to make sure you have it in writing. An example of when you wouldn’t want your spouse named as the primary beneficiary is if your spouse is already financially well off, then you may want to name your children first. Be sure you name secondary and contingent beneficiaries in addition to the primary.
- Minor Children as Beneficiaries – While we are on the subject, be aware that if you do want to name your children as beneficiaries to your pension (as well as life insurance and 401 plans) make sure you check with your plan rules first. Many plans will not pay death benefits to minors and could be held until a court appointed guardian/trustee can be found. You should make sure you have a guardian or trustee set up ahead of time so you know how the money will be handled for your minor children.
- Taxes - A non-spouse beneficiary of a pension plan must report the proceeds as “income with respect to a decedent” unless they transfer the proceeds to an IRA or other pension plan. By doing a little tax planning ahead of time your decedents can avoid a lot of taxes.
- Keep your plan current - If you are updating your estate documents make sure your beneficiary designations are aligned with your plan. Outdated beneficiaries can misdirect your assets and negate all of the estate planning you just did. As well, make sure you review and update your beneficiaries after a major life event. A marriage, divorce, death, or birth are all reasons to update your beneficiaries.
- Not Naming Beneficiaries – Even if you don’t name your beneficiaries your money will go somewhere. If your pension is covered by the Benefit Pension Guarantee Corporation (PBGC) the order is first spouse, then children, then your parents, then your estate or next of kin.
As you can see just designating your beneficiaries can be a complicated ordeal, and that’s just the start. In Minnesota there are some large pension providers that require many important decisions with regard to your service credits, transitioning to part-time employment, choosing/calculating your retirement benefits, choosing your best payout option or taking a lump sum and many others.
If you need help determining the best beneficiary designations for your pension or just have questions about retirement feel free to reach out.