Financial security in retirement is a paramount concern for many Americans.
Financial security in your Golden Years typically comes from a mix of Social Security, individual funds from savings and investments, and oftentimes, defined benefit pension income. Pensions are an important leg to this stool because unlike your personal savings or investments; they can never run out or lose their value – payouts are guaranteed for as long as you live.
But what happens to your pension when you die? Although pension benefits vary, many plans offer members the ability to select a beneficiary to continue receiving their benefit payments if the member dies.
Let’s take a closer look at how it works.
Pension Beneficiaries Explained
Pension plans usually allow only the member and a select beneficiary, such as your spouse, to receive your pension payments. Determining how your pension will be handled when you die depends on the type of plan you have, your age, and if you have already entered retirement and are receiving payments.
The Employee Retirement Income Security Act of 1974 protects surviving spouses of a deceased pension plan participant, although levels of protection vary. Beneficiaries should look at the pension plan’s summary and description to learn what type of plan the member had, as well as what type of survivor benefits they may be able to access.
If the plan stipulates survivor benefits, beneficiaries should contact the pension plan administrator or the former employer of their deceased spouse to initiate a benefits claim. You’ll probably have to provide the administrator with a death certificate as proof that the member has passed.
Once the survivor benefit process has begun, you can expect to learn whether death benefit payments will be dispersed in the form of monthly annuity installments or in a lump sum. Some plans also may offer you the ability to roll those funds over into another type of retirement account.¹ You’ll have to report either type of proceeds on your annual tax return.
If the member had already started drawing benefit payments from the pension, then the amount of death benefit payments to beneficiaries is offset by the amount drawn by the deceased member. If the member had not yet retired and had not begun receiving pension payments, the beneficiary may be offered a lump sum payment instead. Lump-sum payments are calculated using a multiple of the deceased member’s salary and his or her years of employment.
The Bottom Line
Pension providers often require members to designate a beneficiary when they set up their pension plans. Qualified beneficiaries include surviving spouses, children, and minors, who may receive survivor benefits depending on the rules of the plan. Factors such as the member’s age and retirement status affect potential benefit payments to beneficiaries.
To learn more, contact the pension administrator or provider to learn what beneficiary payments to which you might be entitled.
Sources:
1. Retirement Topics: Death, IRS.gov, https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-death
