Facts, forethought can help make most of pension plan

Today, millions of American workers depend upon private pensions to help fund their retirement years. Private pensions, combined with Social Security and personal savings, are the primary components of retirement income.

If either party in a married couple is eligible to receive a pension, the pension will figure prominently in their retirement planning. However, pension laws are complicated, so it is important to learn the facts about a company's pension plan to ensure receiving the benefits to which an individual is entitled.

There are two basic types of plans:

Defined benefit plan

A defined benefit plan typically is funded entirely by the company and provides designated benefits; such benefits often are stated as a percentage of pre-retirement pay.

Defined contribution plan

A defined contribution plan usually is funded by a combination of employer and employee contributions. Benefits will be based on the sum of the contributions themselves and the income earned by the invested contributions over the years.

Questions to ask

If an individual is covered under a pension plan, there are some questions he or she should ask the benefits specialist at the place of employment:

What are the eligibility requirements? Most defined benefit pension plans require employees to meet age and service requirements before they are permitted to become plan participants.

When do benefits become vested? In other words, when do benefits belong to the pensioner, whether continuing to work for the same employer, laid off or fired?

How is the amount of the pension calculated? When do benefits begin? Will those benefits ever increase once they begin?

What are the payment options? Will the pensioner have the option of electing a lump-sum payment instead of monthly benefits?

Will dependents be protected after the pensioner's death? Or will the surviving spouse be protected?

How much money can the pensioner expect to receive? Is that amount "integrated" with Social Security benefits? ("Integration" refers to a practice whereby employers may reduce the amount of pension benefits workers may receive by a percentage of their Social Security benefits.)

When can an individual retire under the plan? How will the pension be affected if the pensioner retires early or continues working past age 65?

What happens to pension benefits if the pensioner leaves the job for a period of time to return to school, have a baby, care for an elderly relative, or for another reason?

Decisions to make

An individual typically has three decisions to make when it comes to a pension. They involve:

Dependent protection. If the pensioner is vested, a joint and survivor annuity, with regular payments made to the spouse after death, is automatic under pension law. If a couple, in writing, fore-go this option, they can choose another under the employer's plan. One such option might be a life annuity, ending at the pensioner's death.

Although a life annuity will provide larger monthly payments than a joint and survivor annuity, election of this option may mean that an individual is gambling on outliving the spouse ... or on his or her ability to survive economically without either the pensioner or the pension.

Lump-sum or monthly payments. An individual may have a choice at retirement between regular monthly payments and a lump-sum payout of the pension benefit.

Tax treatment. How the pensioner receives pension funds affects the amount of tax that will be due. If the pension is received in monthly installments, those installments (except for the individual's own contributions) are taxable. If the pension funds are received as a lump sum, the pensioner may be entitled to a special five-year averaging provision.

Finally, in beginning to evaluate pension coverage and to consider other financial options in planning for the retirement years, an individual should not forget to take advantage of the information available from his or her insurance agent.

(Buckley Van Hooser is an agent for New York Life Insurance Company and a registered representative for NYLIFE Securities Inc.)