The Retirement Corporation of America

All About Distributions From A Defined Benefit Plan

A DB PENSION isn't quite the "everyone has one" retirement plan it used to be. It wasn't that many years ago when a DB plan was the only "game in town." But plenty of people still have a DB pension plan. Here is what you have to know about distributions from a DB plan, depending on your employer:

Distribution Strategy #1: You are given an annuity. That is what the majority of companies offering DB pension plans do. Your employer purchases an annuity from an insurance company that will pay your pension in installments—usually monthly installments—from the day you retire. Your only choice is how you want the payments:

•  50 percent joint-and-survivor annuity. You get a payment for as long as you live. At your death, 50 percent of that payment continues to your spouse.

•  100 percent joint-and-survivor annuity. You get a payment for as long as you live. At your death that same payment continues to your spouse.

•  Single-life (or "life-only") annuity. You get a payment for as long as you live. At your death, all payments stop, even if your spouse is still alive.

•  Term-certain annuity. Full payments are made to you and your spouse for a given period of years—after which all payments stop.

The single-life annuity pays a higher monthly payment than a joint-and-survivor annuity because it covers only one life. However, if you are married, then your spouse must waive his or her right to your pension in writing before you are able to accept this option.

Distribution Strategy #2: You are given your money in a lump sum. Some companies will pay your pension in a single, lump-sum payment. That can give your retirement fund a considerable boost, and you can take over managing it. The downside to any fixed-income investment, such as a fixed annuity, is that the payment isn't indexed to inflation. You can invest the lump sum in stocks, so your pension acquires the ability to keep pace with inflation. If your employer offers a lump-sum option and you feel you can invest it wisely, it's a good way to go.

If You Have a Choice, Which Should You Choose?

Getting your pension in a lump sum can prove overwhelming for some people. You've worked hard for your money—why not spend some of it on a cruise or to buy a summer home? Here's why not:

•  You are spending money out of your retirement fund you may wish you had in 15 or 20 years.

•  You are triggering a tax bill that you wouldn't have had to pay if you rolled the lump sum into an IRA and continued the tax sheltering for a while longer.

Most pensioners are wise to select a plan that calls for the payment of survivor's benefits. Perhaps the only retiree who can afford to reject this provision is one who will leave his or her spouse financially well-off, or one whose spouse is eligible to collect a large pension based on his or her own work record. Certain legal documents must be signed and filing deadlines met by retirees who want to reject survivor's benefits, so you should discuss all your options with the company representative in charge of the pension plan.