When it comes to protecting beneficiaries, financial planning gets detailed. I have a client whose husband spent a good part of his professional career at a “household name” company. He worked hard and made his way up the ladder to a mid-to-upper management level. He was then offered the ability to take part in a pension plan. This meant that once he hit retirement age Household Name would pay him a monthly payout based on a percentage of the average of his top three salaries. In his case about $30,000 a year. This benefit was “vested” meaning he would still get this benefit even if he left the company, which he eventually did.
Eight Years Later
Fast-forward 8 years. The company then contacted him out of the blue with respect to his old pension. They offered these choices:
- Leave the money in the pension managed by the financial partner of said company;
- Withdraw the cash balance of the pension (an amount much less than the actual present value of the future income stream), paying taxes and penalties;
- Roll the cash balance of the pension into another qualified account, such as an IRA
Since the cash balance was so much lower than would be needed to provide a similar income stream as the pension would eventually, his first inclination was to leave the money where it was. However, after reading the fine print, he noticed something unexpected, but not unheard of in the terms.
If my client’s husband had chosen Option 1, his family would have had no rights of survivorship. That meant if he passed away, my client and her children would have no legal claim to any money from the company going forward. So, even though rolling the money over meant a loss because the pension terms were ending, the family now has a tidy sum of money to add to their retirement savings that they can completely count on no matter what happens to the spouses.
This might not be the best solution for every family, but at least they were able to make an informed decision. Unfortunately, some people in similar positions that might not have read the “fine print” and could be making mistakes or at least uniformed choices.
The moral of the story? Check your Pension and Retirement plans carefully (See more about plan beneficiaries). Make sure the money you are counting on for your family is truly going to be available upon the death of the plan participant. You do not want to expect regular payouts that are not going to come … that spells disaster for your family’s future.