What Happens to Your Pension if You Die Before You Retire?

by Cynthia Myers

    A pension provides you with an income after you retire and are no longer working. Pensions are also known as defined benefit plans, because they pay you a fixed amount each month. Some pension plans give you the option of receiving a lump sum to invest as you wish. Most of the time, the longer you work, the more you expect to receive from your pension when you retire. If you die before you reach retirement age, the money in your pension doesn’t go to waste. It passes to your heirs or beneficiaries.

    Vesting

    To qualify for most pensions, both public and private, you must first be vested in the pension plan. Your employer requires you to work a set number of years before you’re entitled to 100 percent of the benefits of the pension. For instance, your employer may require you to work three years before you are eligible for your pension, at which time you are fully vested. Or the employer may require five years of employment before you’re fully invested, but you are entitled to 20 percent of full benefits after a year, 40 percent after the second year, and so on until you reach five years of employment. If you die before you’re fully vested, your heirs or beneficiaries receive the amount you would have received, or funds equal to the percentage in which you were vested.

    Beneficiary

    When you enroll in your employer’s pension plan, you designate a beneficiary to receive your pension should you die before you’re able to collect the money. You can designate a single beneficiary or multiple beneficiaries and you can designate the percentage of your pension that each beneficiary will receive. For instance, if you have a spouse and two children listed as your beneficiaries, you might give 50 percent of the pension to your spouse and 25 percent to each of the children. If you’re married and you choose a beneficiary other than your spouse, most plans require your spouse to sign a waiver verifying agreement to this arrangement. You might also need to designate a secondary beneficiary. The secondary beneficiary receives the money if your primary beneficiary precedes you in death. Update your beneficiary form every few years to reflect any changing circumstances in your life, such as a divorce or the birth of children.

    No Beneficiary Designated

    If you fail to designate a beneficiary for your pension, or if you don’t update the information and the beneficiary you originally designated has died, your pension will be distributed according to the rules of the pension plan. With some plans, the pension will go automatically to your spouse or, if you are not married at the time of your death, to your children, or to your next of kin. In other cases, the pension will become part of your estate, to be distributed according to the terms of your will.

    Payout

    Each pension plan sets its own rules for paying beneficiaries. Some will pay a lump sum. Others allow the beneficiary to collect equal payments over a period of years. If you’re married, this can provide your spouse an income for a number of years. Your beneficiary will need to claim the proceeds from the pension as income on her taxes.

    About the Author

    Cynthia Myers is the author of numerous novels and her nonfiction work has appeared in publications ranging from "Historic Traveler" to "Texas Highways" to "Medical Practice Management." She has a degree in economics from Sam Houston State University. Before turning to freelancing full-time, Myers worked as a newspaper reporter, travel agent and medical clinic manager.

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