Do I Get to Keep My Husband’s Pension?

This is one of the most common questions asked of the recently widowed. Unfortunately, the answer is, it depends. In this post we will look at what a pension is and isn’t, look at common pension payout options, and understand how your spouse’s choice of payout options results in whether you as the surviving spouse continue to receive some, all or none of your husband’s pension after he dies.

To make sure we all are using the same terminology, a pension is like receiving a monthly paycheck after retirement. Pensions may be offered as an employee benefit by a government organization such as federal, state, county, city government or the military. Some companies offer pensions as well; albeit less and less these days. There are other benefits that are pension-like; Social Security (SS) retirement benefits and annuities that are converted to periodic payments are several examples. Some confusion exists between pensions (known as Defined Benefit plans) and retirement accounts such as a 401k, 403b (known as Defined Contribution plans) and even IRAs (Individual Retirement Account). An employer may offer an employee both a retirement account, such as a 401k, and a pension. Defined Contribution plans such as a 401k have an account balance that normally grows over time due to employee and employer contributions and investment gains. An employee will receive a monthly statement from the account custodian showing the current account balance, contributions made during the month and how the account is invested. At retirement the 401k account is often rolled over to an IRA. A Defined Benefit plan, during the working years, may or may not require employee contributions. Normally, a Defined Benefit plan does not have an account balance but rather promises a benefit in the form of a monthly pension after retirement (assuming the employee doesn’t take the Lump Sum option described below).  

As the employee approaches retirement, they normally must decide on which pension payout option to select. Pension payout options almost always include a Single Life option, at least one Joint or Survivor option and sometimes a Lump Sum option. There may be additional payout options including those that provide pension benefits lasting a specific number of years, such as 10 or 20 years. Some pension payout options provide higher benefits early, usually prior to the employee’s normal Social Security start date, then lower the pension benefit once SS is expected to start. Here’s a description of the three most common payout options:

• Single Life – This payout option usually provides the highest monthly pension amount, but the pension is only paid as long as the retired employee (retiree) is alive. Once the retiree dies, the pension payments stop. For example, the retiree may be promised $3,000 a month for his or her life. This amount may or may not increase over time due to Cost Of Living Adjustments (COLA). Company pensions often do not include COLAs but many government pensions do have some amount of COLA. A COLA provides an increase in monthly benefits on a yearly basis. During the pension payout option decision process, if the employee is married but desires to take the Single Life option, the company or government organization usually requires the employee’s spouse to sign a document stating they understand the Single Life option is selected and the pension will not continue after the retiree passes away.
• Joint/Survivor – This payout option does provide a pension benefit after the retiree passes away. The Joint/Survivor option has a percentage associated with it and there may be more than one Joint/Survivor option with different percentages. For example, the Joint/Survivor option may be a 75% Joint/Survivor option, meaning the surviving spouse receives 75% of the amount received by the retiree after they die. If the retiree receives $2,800 a month (usually less than the Single Life amount because the benefit must be paid over a couple’s lifetime, not just one person’s lifetime) and passes away, the surviving spouse receives 75% of the $2,800 or $2,100 per month. This $2,100 lasts for the life of the surviving spouse. Other common joint payout options are the 100% Joint/Survivor and 50% Joint/Survivor. It’s only with a Joint/Survivor payout option that the surviving spouse receives some amount of pension payment for the rest of their life should their spouse (the employee who originally earned the pension) pass away first.
• Lump Sum – Selecting this pension payout option results in a lump sum of cash paid to the retiree, with the lump sum usually getting rolled or transferred to an IRA, or in rarer cases, taxes are withheld and a lesser amount is paid directly to the retiree (instead of getting transferred into an IRA). The Lump Sum amount is calculated based on current interest rates, life expectancy of the retiree and the monthly amount promised if the retiree had selected one of the monthly payment options. Often a Lump Sum option is selected by the retiree if they need a large amount of cash to cover some expense or they believe they can invest the lump sum better than their company or government agency can (this is a whole separate discussion!). From a financial planning perspective, having a guaranteed monthly paycheck that lasts for life often provides more financial security than trying to invest that lump sum, deal with stock market ups and downs and then decide how much can safely be distributed each month while not running out of money. If a Lump Sum option was selected, and the retiree passes away, there is no monthly pension payment due to the surviving spouse. The pension benefit, if it hasn’t been spent, is what is left of that lump sum payment, most likely sitting in an IRA in the deceased spouse’s name.

As mentioned, there are other pension payout options, but the three listed above are the most common. Monthly pension payments don’t always start immediately after the employee retires. If the employee retires at age 60, they may have decided to start their pension at age 62 or 65 or some other age.

Important Planning Point: If you do receive a pension with no COLA (meaning the monthly amount is fixed for life), make sure you know if any of the monthly amount should be saved or put to the side for increasing future expenses. Even though the pension doesn’t have a COLA, things do tend to cost more over time and your purchasing power could erode without proper planning.  

So, the question is, do I get to keep my husband’s pension? The answer depends on which pension payout option they selected. If they passed away prior to making such a decision, contact their company’s Employee Benefits office to find out your pension options. Most likely, upon notice of the employee’s death, the company will already be preparing a benefit package for you. If the retiree already made a pension payout decision but they pass away prior to the pension start date, again, contact the company’s Employee Benefits office. Take heed of the same advice should the retiree pass away after pension benefits have started, especially if you can’t find the pension payout paperwork showing which payout option they selected or if there is any confusion as to which pension option they selected. Some pensions are complicated and have multiple pieces and parts based on different employment periods. Some of these parts may start at retirement and then stop at age 62 or 65. Others may last a lifetime, and some may only start at age 65. Pensions can get tricky!

Of course, some situations are even more complicated. If each spouse earned their own pension or pensions, this fact should not affect any joint or survivor pension benefits expected from your spouse’s pension. However, if you are also expecting Social Security survivor benefits (widow benefits), these benefits may be reduced due to you receiving your own pension. If your own pension was earned at a company or organization where you paid SS taxes, there should be no reduction of SS widow benefits. But if you worked in a noncovered position, meaning it was a job where collection of Social Security tax was not required, your SS survivor benefit might be reduced. The SS reduction, called the Government Pension Offset or GPO is equal to 2/3rds of your own pension collected. Let’s assume you worked in a certain school district which was not required to collect SS taxes, and you earned a pension of $1,200 a month from that teaching job. Your husband passes away and you are expecting $1,800 in survivor/widow SS benefits. Those SS benefits may be reduced by 2/3rds of your $1,200 pension or by $800 resulting in SS payments to you of $1,000 instead of $1,800. If your husband also earned his own pension and selected a Joint/Survivor pension payout option, you will most likely collect this Joint/Survivor pension as well.   

If you and/or your spouse have not yet made a pension payout decision, or because of his death you now have additional pension payout options, a pension payout analysis can be of tremendous value. This analysis should compare the various payout options available to you, especially if a lump sum option is available. Sometimes the pension analysis shows that the monthly payment options are very valuable when compared to how the lump sum might be invested. Other times the lump sum appears to be a better choice; maybe the company backing the monthly payments is not financially stable and you might not want to rely on that company for the rest of your live. A pension analysis is not the only information needed for an educated decision. Knowing which pension payout option is best for your situation often requires taking into account other factors such as Social Security claiming strategy, retirement savings, future wages, other existing pensions, expected living expenses, ad hoc expenses such as future car replacements and your health and life expectancy. Be warned that some “advisors” will lean you toward taking a lump sum option, even without doing any pension analysis, so they can then earn fees or commissions on that lump sum. Make sure your advisor is a fiduciary. I have a separate blog post on the topic of selecting and evaluating a financial advisor.

Lessons Learned:

• A 401k is not a pension, but the term “pension” is often misused when referring to a 401k account.
• If a married retiring employee selects a Single Life pension payout, there should be a very good reason for choosing this option. In such situations, the company requires the non-employee spouse to sign the pension paperwork stating they understand their spouse is selecting the Single Life option and that no Joint / Survivor option will be paid if the employed spouse passes away first.
• Understanding which pension payout option to take often requires a pension payout analysis along with looking at other factors. Don’t make the pension payout decision in a vacuum.

Jim Schwartz is a Scottsdale, AZ fee-only financial planner with an expertise and interest in financial planning and education for widows and widowers.  Years of working with and advising widows, widowers, and surviving partners has provided a wealth of experience and knowledge in this complicated financial arena.  He is particularly skilled in his ability to guide his clients through difficult decisions while ensuring the stability of their finances. 

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Jim Schwartz, CFP®, RICP®
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