If you're fortunate enough to work for a company that offers you a pension plan, you can feel good knowing that come retirement, you'll have a steady income to draw from. But what happens to your pension if you die before you retire?
The importance of naming a beneficiary
When you initially enroll in your employer's pension plan, you'll be asked to name a beneficiary. The beneficiary is the person who will receive your pension when you die. Much like naming a beneficiary on a life insurance policy, you can name one or more individuals to receive the benefits of your pension. If you don't designate a beneficiary or if the original beneficiary has since died and you failed to assign a replacement or don't have a contingent beneficiary, your pension will be distributed according to the rules specified in your pension plan and in some cases, your state of residence. With some plans, that could mean having benefits distributed to a surviving spouse (if you have one), your children (if any), your parents (if still alive), or other next of kin. Therefore, if you want to have a say in who inherits your pension, assigning a beneficiary and regularly reviewing your beneficiary form is important.
The pension payout
How your beneficiary is paid depends on your plan. For example, some plans may pay out a single lump sum, while others will issue payments over a set period of time (such as five or 10 years), or an annuity with monthly lifetime payments. Regardless of how it's distributed, your beneficiary will be required to report the proceeds from your pension as income on his/her taxes.
If you were to die before you retire, your surviving spouse or other named beneficiary must contact your employer or the plan's administrator to make a claim on any available benefits. At that time, the plan administrator will generally request a copy of the death certificate. Depending on the type of plan, your surviving spouse or other named beneficiary will be notified as to:
the amount and form of benefits (in other words, lump sum or installment payments under an annuity);
whether death benefit payments from the plan may be rolled over into another retirement plan; and
if a rollover is possible, the method and time period in which the rollover must be made.1
As a part of your retirement planning, don't forget to make sure you have named a beneficiary to your pension plan. To learn more about pensions and defined benefit plans, visit the Protective Life Learning Center.
1. https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics---Death
WEB.1950.03.16
