Pensions

At its simplest, a pension is a retirement plan. Pensions can be offered to workers through private companies, the military, the government, unions and other organizations. The pension is funded through regular contributions over the years of an employee’s career, and at retirement, the pension funds are available to that employee as retirement income.

Funding Pensions

Some pensions are funded by deductions from a worker’s paychecks. The teacher who has a regular amount taken from her paycheck is funding her own pension, for example. Other pensions are paid for by the employer as part of a benefits package.

Pension funds paid in for and from many workers accumulate until a worker reaches retirement age, which may be as low as 55. Once the worker reaches retirement age, the pension is paid from the pool of resources, a steady source of income similar to a salary. Many pensions also include an insurance guarantee to provide for the life of the retiree. It may also cover the retiree’s spouse and survivors if full benefits have not been paid out.

Your Pension and Payouts

When you reach retirement age, you have one opportunity to make a choice on how you want to receive your benefits.

  • When you reach retirement age, you have one opportunity to make a choice on how you want to receive your benefits.
  • Lump-sum payout - You have the option to skip the regular payments and take a single lump sum payout instead. This payout can then be reinvested any way you’d like in hopes of returning larger incomes over time. The lump-sum payout also offers greater flexibility in how and when you use your retirement funds. You can take the lump sum and purchase an annuity, invest in stocks, mutual funds or an IRA or arrange to leave the funds to others.

In some cases you can take a combination of the two options, taking some funds in a lump sum and receiving the rest in a decreased regular benefit. Ultimately the choice you make in how to receive your pension will be determined by your specific options within your plan, your family, your health and your current financial outlook.

Pensions Decreasing

Increasingly there are fewer pension options available today. Most private companies are opting for defined contribution retirement plans like 401(k)s and IRAs. These plans require less from the company and give the employee greater control over his or her own retirement funds.

While 401(k)s require more discipline from employees, they are also considered less fragile than some pension plans. When a company providing a pension plan to its former workers goes out of business or declares bankruptcy, often the pension holders are left depending on the government’s Pension Benefit Guarantee Corporation to ensure their benefits are paid.

Even with traditional benefit plans decreasing, they are still in place across most of America. One in three Americans of retirement age receives pension funds. These funds may be from the state, federal or local government or perhaps a private pension. Many retirees receive veteran pensions as well.

Disappearing Pensions

Many believe that over time, the traditional pension will disappear in the private sector, and many are calling for reductions in government and public sector pensions as well. Pensions, like all defined benefits plans, have two potential issues. The pension may lose its sponsoring entity if the fund goes insolvent, and inflation always presents a serious risk.

Congress has attempted to address both of these issues, and cost-of-living-adjustments are now required in pensions, but may not reflect the true rise of inflation.

The Pension Benefit Guarantee Corporation set up by Congress may step in to guarantee the pensions of those hurt by dissolving and insolvent companies, but the organization can’s cover the full cost of a benefit program – retirees will definitely be hurt despite the guarantee.

This is especially true with public pensions. The public pension is not protected by the Pension Benefit Guarantee Corporation, and as the recent bankruptcy in Detroit showed the country, even government workers aren’t safe.

Veterans Pension

If you have served in the military and meet certain qualifications, you may be eligible for the Veterans Pension. The program is a monthly benefit that is available to veterans based on a demonstrated need. The funds are tax-free as well.

In order to qualify for the Veterans Pension, you must have served at least 90 days of active duty during wartime including WWI, WWII, Korea, Vietnam or the Gulf War. You might have instead served at least 24 months of active duty after Sept. 7, 1980.

To be approved for the Veterans Pension, you must also meet one of the following criteria:

  • Be 65 years or older
  • Be completely and permanently disabled
  • Be a nursing home patient receiving skilled nursing care
  • Receive Social Security Disability Insurance (SSDI)
  • Receive Social Security Income (SSI)

The survivors of war veterans may also be able to claim a pension. This program is designed for low-income surviving spouses or unmarried children or deceased veterans. To apply for this program, the deceased veteran must have been in service on or before Sept. 7, 1980, and served at least 90 days of active service including at least one day during a wartime period. The deceased veteran may also have served at least 24 months or a full term of duty after September 7, 1980 including at least one day of wartime service.

In order for a child to apply for Veterans benefits, the child must be one of the following:

  • Under 18
  • Under 23 and enrolled in in a VA-approved school
  • Permanently disabled and incapable of self-support before age 18

The child must also have income less than the amount set by Congress.

Supplements to Veterans Pension

In addition to veteran pensions, the qualifying veteran can apply for supplemental income such as Aid & Attendance (AA) or Housebound plans to cover certain needs. The veteran may qualify for these plans if he or she:

  • Needs assistance with bathing, feeding, dressing or wearing a prosthetic device.
  • Is bedridden
  • Is a patient in a nursing home
  • Has eyesight limited to a correct 5/200 or less in both eyes
  • Is "substantially confined" to the immediate area due to a permanent disability

The Future of Pensions

There is not much clarity in terms of future pensions. Many individuals today, even those who are far from retirement age, support the idea of pensions. As many as 90 percent of Americans polled by the National Institute on Retirement Security liked the idea of a universal pension that would transfer from job to job.

As part of the uncertainty of pension plans, many companies are trying to convince retirees to sell their pensions. These deals may be termed a "pension loan" or "mirrored pension", and some of the deals being offered to pension-holders aren’t legal or enforceable. In fact, the IRS flat-out prohibits the sale of private pensions.

If you are contacted by an agency looking to buy or arrange a "loan" from your pension, be careful to check with your financial planner as well as your fund’s manager to determine the legalities of the arrangement if it is something you are legitimately interested in.

Selling Your Pension

The fact that a pension is often funded by annuity accounts makes them similar to structured insurance settlements with scheduled payments. This tends to attract the interest of structured settlement annuity buyers for the opportunity to purchase future payments and offer you a lump sum.

In the event that you've exhausted all options to take care of personal finances or debt and still considering to sell your pension, it's important that you speak with your plan administrator and/or attorney before attempting to sell off a transfer agreement. Also keep in mind that while receiving a lump sum, you would be giving up an income stream, and at what is referred to as a discounted rate. This is because buyout companies do not face value, and the individual the payments are transferred to would need to wait the entire term to recoup their investment.

Every situtation is unique, and its difficult to generalize for all scenarios. If interested to find out an approximate value you can use our structured settlement caluclator through the Instaquote link at the top.

References: Pension Fact Sheets, FINRA, SEC, AARP, FTC, Veteran Affairs