Pension Benefit Options Flashcards
If an annuity option is selected, which is likely to offer the highest monthly benefit amount, and why?
Pension Plan
Private Annuity
Pension plans generally offer the highest monthly benefit for a given lump sum value. This is largely due to the fact that pension plans don’t aim to earn a profit.
The above is especially true for women, because pension plans are required by law to use unisex mortality tables (which benefits women because the pension calculates the monthly annuity payment based on lower life expectancy, resulting in larger monthly payments), while insurance companies use sex specific tables.
Approximately what percentage of pension plans offer a lump sum option?
About 50%
Which of the following factors tends to favor taking a pension annuity over a lump sum
A. Good health
B. Family history of longevity
C. Client wishes to maximize estate bequests
D. Low investment risk tolerance
E. Smaller portfolio relative to retirement income needs
F. The pension owner is significantly older than their spouse
All but C. If the client wishes to maximize wealth transfer to heirs, an annuity is not the best option.
What the client profile contextual factors that weigh on the decision to take a lump sum versus a pension annuity?
Client health
Family history of longevity
Investment risk tolerance
Portfolio size relative to retirement income needs
Estate transfer, gifting, charity goals
Desire for liquidity for future business,
lifestyle, or investment goals or opportunities.
Size of expected Social Security benefits for each/both spouses.
Most pensions offer COLAs - True or False
False. Very few offer any inflation protection.
What is “spousal consent” as that term applies to pensions?
Federal laws require that the spouse of a pension participant formally consent in writing to the selection of any benefit other than a joint life with the spouse. For example, the spouse will need to consent to a lump sum or a single life annuity. Note - The Federal spousal consent rules do not apply to state and local pensions.
What are the 3 main benefit options offered by pension plans?
Single life (pays highest monthly benefit) Joint and survivor (typically a 50% or a 75% survivor benefit) Lump sum (offered by about 50% of pensions)
What are the main benefit options offered by pension plans?
Single life (pays highest monthly benefit) Joint and survivor (typically a 50% or a 75% survivor benefit) Lump sum (offered by about 50% of pensions)
What is the origin of Pension Benefit Guaranty Corporation?
How is it funded?
The PBGC was created in 1974 by ERISA. It is funded by insurance premiums paid by private pensions, by its own investments, and by the assets of plans it takes over as trustee, but not by taxes.
How are maximum benefit guarantee amounts set by the PBHG?
How is the maximum guaranteed benefit different than the actual amount
They based on a formulaic method proscribed by Federal law. The formula takes into account the participant’s age at the time their pension is terminated due to bankruptcy. Each year, the maximum increases by law.
The maximum guaranteed amount is just that. In some cases, the PBGC may take over a plan with sufficient assets to pay a higher benefit, but the excess benefit won’t be guaranteed.
If a pension participant has earned a large pension benefit, and is worried about the plan’s financial condition, what might they do to reduce risk to their benefits?
One option is request a partial lump sum of a size that brings their monthly benefit from the pension in line with the PBGC guaranteed maximum limit, and use the lump sum to invest or to purchase a private annuity.
What are the PBGC maximum guaranteed monthly benefit amounts for a 65 year old and 70 year old in 2016?
65 year old
Single Life - $5,512.50
Joint Life - $4,961.25
70 Year Old
Single life - $8,318.86
Joint life - $7,486.97
The PBGC is not funded by the tax payer. What would happen if the PBGC was not able to meet its obligations to pensioners due insufficient assets?
The PBGC is not explicitly backed by the U.S. Government, but for political and economic reasons many believe that Congress would come to the aid of the PBGC in the event it could not provide guaranteed benefits to pensioners.
What happens when a private pension plan decides to terminate due to financial distress.
Generally, it is a multi-employer plan (MERP), then the PBGC may make loans to keep benefits flowing to pensioners without taking over the plan. For single employer pension plans, the PBGC typically takes over as trustee, and uses the plans assets plus it’s own asset to pay guaranteed pension benefits. When the PBGC takes over as trustee of the fail plan, it becomes a general creditor of the sponsoring company, and will attempt to recover money from the employer to help pay pension benefits.
What happens when a private pension plan decides to terminate due to financial distress.
Generally, it is a multi-employer plan (MERP), then the PBGC may make loans to keep benefits flowing to pensioners without taking over the plan. For single employer pension plans, the PBGC typically takes over as trustee, and uses the plans assets plus it’s own asset to pay guaranteed pension benefits. When the PBGC takes over as trustee of the fail plan, it becomes a general creditor of the sponsoring company, and will attempt to recover money from the employer to help pay pension benefits.
