Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: One of my clients is planning to retire in about three years.  The client’s employer sponsors a defined benefit pension plan, and I am wondering whether the client might be a candidate for the pension maximization (pension max) idea.

Answer: For those who are participants in defined benefit or money purchase pension plans, making the right choice between the various pension payout options can mean the difference between a comfortable retirement and one that is financially tight.

In some cases, the strategy of pension maximization (pension max) can help ease the financial stress of retirement.

What is pension max?

A pension participant may be required at retirement to choose between two types of benefits:

• A life only benefit, which pays a monthly retirement income for the lifetime of the participant, or

• A joint and survivor benefit, which pays a monthly retirement income for the lifetime of both participant and surviving spouse.

The life only benefit is usually higher than the joint and survivor benefit.  However, if the participating spouse dies first, the benefit will be paid for a shorter time.

In some cases, it makes sense to choose the single life option and buy insurance on the life of the retiree.  That’s the pension max concept in a nutshell.

If the retiree dies early, the insurance is available to provide income to the surviving spouse or to protect other family members.  If the spouse dies before the retiree, the participant can cancel the policy—and continue to collect a higher pension benefit.  Or the retiree can continue paying for the insurance to provide money for other family members.

Pension max isn’t for everyone.  We strongly recommend that you work closely with the client, the pension plan administrator and the client’s accountant to determine whether pension max might be a fit.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.