Immediate Personal Pension Plans
What is an Immediate Personal Pension?
An immediate personal pension is one where your monthly pension checks start immediately -- usually within 30 days of your selection of this pension plan.
An immediate pension is used to provide the basic monthly living expenses that Social Security cannot cover. These expenses usually consist of housing costs, food, and basic transportation. If you can guarantee you will have enough income in retirement, you or you and your children will never worry about how you’re going to meet your basic needs in your retirement years. That is the reason for having an immediate pension.
This type of personal pension plan allows you the security of knowing you will continue to receive money each and every month – even if you live to be well over 100. If the biggest risk in retirement is running out of money, an immediate pension can guarantee that you won’t.
An Immediate Pension provides security for when:
- You want the certainty of knowing you won’t outlive your income.
- You have retirement expenses not covered by your monthly pension.
- You also want to protect your assets from expensive nursing home costs.
Immediate Pensions help provide asset protection.
Immediate pensions are often used for Medicaid planning purposes. An immediate pension removes assets from your estate if you should ever need to qualify for Medicaid. This helps you meet the minimal requirements in qualifying for Medicaid benefits.
Creditor protection is another benefit with this pension. In most states, your immediate pension is exempt from attachment by creditors. This is especially important, for example, if a future disability or court judgment were to occur in the future.
How do I secure an Immediate Pension?
You can secure an immediate pension from personal savings or the proceeds of qualified retirement plans. Retiring employees who are heavily invested in their own company stock should look at diversifying some of that future retirement funding in order to reduce the overall risks to their eventual retirement income. Rolling over a 401(k) or IRA or an existing company pension to an immediate personal pension is one way to eliminate this funding risk in trying to guarantee a source of lifetime retirement income.
If you secure your immediate pension with funds that have already been taxed, the majority of your monthly pension check is not taxable since it's considered a return of your own capital. In this type of case, the pension provider will indicate the amount of your monthly check that is excludable from taxes.
What are the potential drawbacks to an Immediate Pension?
Depending on your selection of eventual payout options (see below), the biggest drawback to an immediate pension is that the pension could die with you. If you select an immediate pension and then get hit by a bus the next day, all of your money is gone. Because of this, an immediate pension that ends with your death may adversely affect your heirs.
In addition, you would no longer have use of that money because you've turned it over in exchange for lifetime monthly pension checks so you want to be sure you have enough savings left for emergencies or to leave money to your heirs.
Are there options if I no longer want my Immediate Pension?
With most immediate pensions, you cannot change your mind once you’ve selected it. For example, if you’ve been receiving two years of monthly pension checks, then you suddenly changed your mind and wanted the balance of your pension value, you cannot cancel your pension and get the remaining pension value back.
However, if you decided you absolutely had to have a lump sum of money, there may be a company who might be willing to purchase your remaining pension value at a discounted price.
What determines the size of my pension check?
First, you can choose how often you receive a payment from your immediate pension. It can be monthly (usually), quarterly or annually. The size of your check is based on the amount of money you initially contributed, plus a number of other factors including your age, sex, income option selected, and interest rates at the time of purchase.
What are the three most common pension payout options?
Life-Only Payouts
If you are the only party to an immediate pension and select the life-only payout option, then payments continue as long as you live, but stop upon your death.
If you choose a life-only payout option and pass away one year later the pension company does not return the rest of your pension value to your heirs. This makes life-only payouts a better choice for singles with no children but not a great choice for married couples or heirs. A life-only payout term will result in a higher monthly income stream than a joint life term.
Joint Life Payouts
Typically for couples, joint life pension payouts are structured in a similar manner as life-only, but payments will continue as long as either spouse lives.
Although you will get a lower monthly income than with a life-only option, joint life pension payments insure that income will continue to a surviving spouse.
Term Certain Payouts
A five or ten year (for example) term certain pension payout option means your payments are guaranteed to be made for five or ten years. If you were to pass away during the first year, payments would continue to your named beneficiary ending only when the term is completed.
Term certain payouts can be a good way to provide income in situations where you have a secondary source of income that will start at a later date. For example, suppose you retire at 60, but your traditional company pension benefit will not start until age 65. You could consider purchasing a five year term certain pension to provide income for the five years between age 60 and age 65.
It's important to remember that immediate pensions provide a reliable income stream with an emphasis on security. Individuals concerned with passing their assets on to their heirs should take a close look at the payout options given with an immediate pension. This may sound obvious, but when you select the "life only" payout option within an immediate pension the issuing company is only obligated to make payments to you for the rest of your life. If you should die a month into the contract the company keeps the rest of your money and nothing goes to your heirs.
On the other hand, you’ve won if you outlive the actuarial tables. So, it can work both ways, but the important thing to understand is you won't be bequeathing these funds to your heirs with a life-only payout option. A term certain payout option would be the one to select in this case for inheritance purposes.
Is an Immediate Pension right for me?
As more and more employers discontinue the more traditional types of company pensions, demand for all types of personal pension plans is expected to grow exponentially as every age group of American workers starting with the baby boomers through those just starting their work careers (index pensions are ideal for younger ages) scramble for guaranteed sources of future retirement income.
Americans are living longer than ever. The idea of living a longer and healthier life appeals to all of us, but for many, the tradeoff is outliving our retirement savings. An immediate pension for older Americans can help with this dilemma in providing us with an income stream that we can never outlive.
Wait! Could there be another use for an Immediate Pension?
This begs a question. Have you ever heard of a parent or grandparent who always seemed to worry about how a spendthrift child or grandchild will fare in life? An Immediate Pension provided to that offspring using a five or ten year Term Certain payout option would be an excellent way for the older relative to say, “You have this amount of time to finally get your life in order!” This would be a tremendous way to relieve an individual of any anxiety upon their own passing.
If you would like to see if an Immediate Pension can be appropriate for you then please click here to find a local personal pension plan expert.
