Q: I will turn 65 in February and would like to begin drawing my DB pension shortly thereafter. The latest calculation indicated an approximate (before tax) payment of $1,500.00 a month for life. The ‘for life’ part is where I have a problem. It bothers me to know that if I was to leave the gene pool while there was still a balance in my pension account, none of the remaining funds would be paid to my estate. There is the option of taking a 10 0r 15 year guarantee, but at $100 a month this seems expensive. Any suggestions?
A: Defined benefit (DB) pension plans can provide you with a smooth transition into a comfortable retirement lifestyle or play a healthy part in your overall retirement resources. You will be faced with a few decisions as retirement nears, one of which is a guarantee period. You will have the option to choose a minimum guaranteed number of pension payments. The selected guarantee would be a cost that reduces your monthly pension amount.
The guarantee period is fixed to the day you start your pension—not to the day you die. If you outlive the guarantee period, nothing goes to your beneficiary.
|No guarantee||Pension payments stop upon death||No cost|
|Assurance the pension will pay out for five years to you or, should you die, continues to your beneficiary||In a Joint Life situation, the guarantee period applies to the last to die.|
|Assurance the pension will pay out for 10 years to you or, should you die, continues to your beneficiary|
|Assurance the pension will pay out for 15 years to you or, should you die, continues to your beneficiary.|
The life expectancy of a Canadian woman, sourced from Stats Canada, at age 65 is 21.3 years. A 65-year-old male can expect to live 18.1 more years on average. Both life expectancies are beyond the guarantee periods offered so there needs to be clear reasoning to ignore these statistics.
It may be bothersome to slowly draw on your entitlement but you’ll be singing the praises if you manage to reach your 90th birthday! A pension for life is a great match to the possibility of living a long life.
Factors that influence your decision:
|Purchase a guarantee period if ...||DO NOT purchase a guarantee period if ...|
|You have reason to expect a much shorter life span.||You have normal expectations about life span.|
|Your pension is the primary source of your income and you want to potentially leave something to your beneficiary.||You don't want to pay a premium that is statistically likely to have no benefit to anyone.|
|You lead a less than healthy lifestyle.||Lead a normal to healthy lifestyle|
|Your pension is more than you need so you won't miss the subtracted amount.||Your pension is an effective part of your retirement resources. You assume control over what goes to your beneficiary/estate.|
|You are single and have dependant(s).||Your spouse is the beneficiary (Joint Life).|
|You want to ensure a minimum amount is extracted from the pension plan, no matter what.||You are happy to pocket the extra amount every month while living—thank you very much.|
|You want a specific person to receive your pension should you die early.||Your will is set up to effectively divide your estate without depending on the pension.|
Ask a Retirement Expert: Leave your question for Tom Feigs »Pension decisions are personal choices. Be true to your wishes and be at peace with your new lifestyle!
Tom Feigs is a fee-for-service financial planner, money coach and retirement planning expert based in Calgary, Alberta.
- When to downsize in retirement
- Pay less tax with pension income splitting
- Should I combine my defined benefit pensions?
Watch: If I have a pension should I cut down on bonds?