Pension planning when you have a spouse

Ask NJMoneyHelp

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Q. When I retire and take my pension, if I choose the survivor option but my spouse dies first, I can’t make a change to get the larger monthly benefit. Why don’t they allow that?
— Doesn’t seem right

A. At first glance, it would seem fair that you receive the larger benefit as the plan participant if your spouse dies first.

But that’s not how pension payouts are calculated.

The specific rules related to qualified pension plans that were enacted to provide protection to the spouses of qualified plan participants require the survivor’s annuity to be no less than 50 percent of the participant’s annuity, said Laurie Wolfe, a certified public accountant with Lassus Wherley in New Providence.

She said the amount of the benefits payable both to the participant and to the surviving spouse are determined by an actuary and are based on the actuarially-determined life expectancies of both spouses.

“This results in expected payments in excess of what a single beneficiary would receive,” she said. “This means that a married couple could receive a higher pension benefit than a single person, even though both may have had the same income as employees.”

When actually retiring, the decision of what option to choose results in the establishment of an annuity contract based on the life expectancy assumptions, Wolfe said. Once the contract is established, it cannot be changed.

“These contracts must be funded by the employer company and the level of funding ultimately gets adjusted based on actual outcomes,” Wolfe said. “So, some contracts will pay out a great deal more than was expected when set up — because of longer than expected lives, and some, like yours, may pay out less.”

In order to support spouses after a participant dies, the company takes on the risk of paying out more than the participant actually earned, Wolfe said.

“To offset that risk, the company pays less when the participant or spouse dies before reaching the expected age,” she said.

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