Understanding your Defined Benefit pension options at retirement

There are 2 kinds of pension plans:  Defined Contribution Pensions and Defined Benefit Pensions.  The retirement options will differ depending on the type of pension plan.

Related article:  Pension Plans are the foundation of retirement planning

For this post we will run through some of your pension options at retirement for Defined Benefit Pension so you can make the best choices:

Defined Benefit Options at retirement

When you retire with a Defined Benefit Pension, your employer will send you an options package which will outline all your pension options.  Here are some of the key issues you will need to think about.

Single vs Joint Pension

If you have a spouse, your spouse has rights to the pension under pension legislation.  As a result, your pension options will default to joint pension with a survivorship.  You will likely be given options to have 100%, 75%, 66.67% or 50% of the income continue to the surviving spouse.  Every pension is unique so the options may vary slightly from pension to pension.  The Joint pension will pay a lower income than single pensions.  Some pensions allow the spouse to sign a waiver of rights to allow for single life options.

Guarantee period

The other issue most people face in a pension plan is to choose the appropriate guarantee period.  In most cases, you can choose a 15 year, 10 year, 5 year of no guarantee period.  If someone chooses a 10 year guarantee, the pension is on the hook for the income payments for at least 10 years.  For example, if the annuitant dies after 1 year, the insurance company must pay the beneficiary the remaining 9 years of payments or the commuted value of those 9 years.  The longer the guarantee period, the lower the annual income will be. Mathematically, the theoretical value of the different guarantee periods will be the same.

Related article:  Everything you need to know about life annuities

Choosing the right guarantee period is really a matter of knowing your life expectancy.  If you are going to live a long life then choose a short guarantee period (or no guarantee period).  If you are going to have a short life expectancy then it make sense to choose as long of a guarantee period as possible.

Coordination or integration

Some defined benefit pensions give the option to coordinate pensions with CPP (Canada Pension Plan) and/or OAS (Old Age Security).  The basic mechanics of coordination is you are borrowing money from your own pension prior to age 65 and have to pay back the money once you turn 65.

Related article:  understanding government benefits

In other words, instead of a fixed pension for the rest of your life, you will get a higher pension to age 65 and then your pension will drop after age 65.  Theoretically, the drop in pension at 65 will be offset by new income from CPP and OAS at 65.

Choosing to coordinate your pension may be appealing because of the higher initial income but before you consider coordination or integration, here’s a few more issues to think about

  • The calculation is a theoretical calculation.  The pension does not talk to CPP or OAS so they do not know how much CPP or OAS you are eligible for..  The amounts are theoretical and may not be exact.
  • Choosing the coordinated option does not mean you have to wait until age 65 (or later) to collect CPP.  Keep in mind, if you take CPP early, the pension coordination still happens at age 65.

Related article:  Should you take CPP early?

  • Coordination really benefits those with shorter life expectancies. If you live a long life, you will wind up paying back more income after age 65 than what you got extra prior to 65.

Choosing the right pension options at retirement is a big deal.  You essentially have one chance to make the right decisions because once you elect your pension options, there is no going back.

Next week, we will look at pension options for Defined Contribution Pension Plans

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace. For more information you can follow him on Twitter @JimYih or visit his other websites JimYih.com and Clearpoint Benefit Solutions.

5 Responses to Understanding your Defined Benefit pension options at retirement

  1. A very thorough article on DB pension intricacies. Outlining basics of this kind of pension helps amateurs like me decipher complex language in annual reports. I love your blog posts as they always educate me. Thanks Jim!

  2. My husband left me his company pension plan when he passed away.
    I get 924.34.
    I am also receiving oas supplement of 1278.00.
    Am I allowed the supplement even though I get his company pension ???

    • Hi Monique – I’d need to know more details about how old you are, when your husband died, how long you’ve been living in Canada, how old was your husband, what other incomes did he have and what other incomes did/do you have, are you also eligible for a CPP survivor’s pension etc, etc, etc

  3. wow, thank you for answering me so quickly…

    I was 72 when my husband passed away.(last Febrary 2019)My spouse was 76 years old when he passed away last February.

    I have been living in Canada all my life. Never left Canada, and worked in Canada about 40 years…

    He had a company pension from General Motors, his old age pension, along with the provincial pension..
    He didn’t have any other income.

    I have a survivors pension fund from the company from where he used to work at. And when he passed away, I started to receive the survivor’s pension of 924.34 from G.M.

    I receive part or half of another survivors pension of 267.00 more.. This represents half of his x-wife’s pension.(Before they were divorced, she claimed for half of his Quebec pension), now I’M getting half of was she had claimed.

    Should you need anymore info, please let me know.

    You have no idea how much you are appreciated.
    I thank you so very much.

    • Hi Monique – For the current payment year of July 2019 thru June 2020, the amount of your GIS is based on your income for 2018, which is prior to your husband’s death and prior to you receiving any survivor’s pension. Based on the GIS amount of $1,278 that you say you’re receiving, your 2018 yearly income was probably around $4,450 (not counting your OAS). If that is accurate, then you are presently receiving the correct amount of GIS. The bad news is that starting with July 2020 your GIS will be calculated based on your 2019 income, after which time you will receive little (if any) GIS, based on the total amount of your various survivor’s pensions which started in 2019.

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