Single Life vs. Joint and Survivor Pension: What's The Difference

By Matthew Frankel Markets Fool.com

If you qualify for a pension plan through your employer, you're generally offered at least two options upon retirement -- single life and joint-and-survivor. Single life pensions produce higher monthly income, while joint-and-survivor pensions provide continued income to a beneficiary after you die. Here's a guide to help you determine which is better for you.

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What is a single life pension?

In a nutshell, a single life pension pays a monthly benefit for the remainder of the beneficiary's life. If the beneficiary dies, pension payments stop. Since this option only requires that benefits are paid for the remainder of one lifetime, it typically results in the highest monthly benefit.

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Joint and survivor pensions -- lower income, but could protect your spouse

Joint and survivor pensions make a single monthly payment, but have two beneficiaries -- typically the worker and their spouse. Joint and survivor pensions pay a monthly benefit until both beneficiaries pass away.

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Because there's a good chance that they'll have to pay benefits for longer than a single life pension, joint and survivor pensions typically pay a reduced monthly benefit. Essentially, you're giving up some of your monthly income, in exchange for the peace of mind that your spouse or domestic partner will continue to receive monthly income, even after you're gone.

There may be other options

Depending on your specific retirement plan, there may be additional options. For example, there may be a hybrid annuity option, under which a certain monthly amount is paid during the primary beneficiary's lifetime, and then a reduced monthly payment continues throughout a beneficiary's lifetime.

It's also a common practice to guarantee a minimum lifetime benefit, such as a return of all of your contributions. If you die before the minimum guaranteed benefit has been paid through your monthly payments, the remainder will be paid to your heirs, even if you choose a single life pension.

An example of the options available

Let's take a look at an example of how this works. I teach at a community college, and because of this, I'm enrolled in my state's retirement system. Upon retirement, I'll receive a monthly pension benefit, and I'll be able to choose whether the monthly income will last for my lifetime, or if it will last for the longer of mine or my wife's lifetime.

My plan has three options available:

  • A single life annuity, that expires when the beneficiary dies.
  • A joint and survivor option that continues making the exact same payment until both beneficiaries die.
  • An option where one payment is made until the primary beneficiary dies, and is reduced to 50% of the original amount thereafter.

The actual reduction amounts for the second and third options can vary. For example, if my spouse is 10 years younger than I am, there's a greater chance that she'll live longer than me, as opposed to if we were both the same age.

With that in mind, here's a calculator that can help you estimate what the difference in pension payments might be in your personal situation:

* Calculator is for estimation purposes only, and is not financial planning or advice. As with any tool, it is only as accurate as the assumptions it makes and the data it has, and should not be relied on as a substitute for a financial advisor or a tax professional.

Which is best for you?

There's no one-size-fits-all answer. A single life pension could make good financial sense for many people. In addition to the obvious (single retirees), other factors, such as the amount of your retirement savings, any other income sources you or your spouse have, and your respective ages.

While I'm still a couple of decades away from retirement and there's no telling what could happen between now and then, I'm leaning toward a joint and survivor pension for me. My wife is younger than I am, and won't have a pension from her job (just her 401(k)), so I'd like her to continue to have guaranteed income if I happen to pass away first.

The point is that the best option for you depends on your own situation, so it's important to carefully consider all of the relevant factors before making a decision.

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