It Depends on the Plan and the Choices Made
A pension or annuity may continue paying someone after your death, pay a remaining benefit, or stop entirely. The answer depends on the plan or contract and the choices made before death. That can come as a surprise when a family thinks of everything as an account with a balance waiting to be inherited. A monthly payment does not necessarily represent money that will remain available to your spouse or children when you are gone.
The Payment Option Chosen at Retirement
With a traditional pension, the payment option chosen at retirement is often critical. A single-life arrangement generally pays during the retiree’s lifetime and ends at death, subject to any additional plan provisions. A survivor arrangement may provide a smaller payment during the retiree’s life in exchange for continued payments to an eligible survivor. Those choices can have lasting consequences, so the comparison should include what happens to household income after either spouse dies.
Massachusetts Public Pensions: Options A, B and C
Massachusetts public retirement benefits provide a familiar example. Under the standard state retirement options, Option A generally provides the largest lifetime allowance without an ongoing survivor allowance. Option B may leave a remaining annuity account balance, while Option C provides a continuing allowance to an eligible designated survivor. The applicable system, benefit type, and elections need review rather than assuming every public employee’s benefit works identically. See Massachusetts retirement Options A, B, and C.
Federal Protections for a Spouse
Private employer plans may also provide important spousal protections under federal law. Many pension plans require a qualified survivor benefit unless the participant makes a permitted election and the spouse gives the required consent. Benefits may also be available when a participant dies before retirement. A former spouse’s rights under a qualified domestic relations order can affect the analysis. The plan administrator should explain the actual rights and elections in writing. See IRS guidance on qualified joint and survivor annuities.
Individually Purchased Annuities
An individually purchased annuity requires review of the insurance contract. Before income payments begin, some contracts provide a death benefit to a named beneficiary, with the amount determined by the contract and any riders. After payments begin, the selected payout arrangement becomes especially important. Lifetime-only payments, joint-life payments, and payments guaranteed for a specified period can produce very different results at death. It is not safe to assume that every annuity returns an unused balance to the family. See SEC explanation of variable annuity features.
Owner, Annuitant and Beneficiary
The contract may distinguish among the owner, the annuitant whose life is used for certain calculations, and the beneficiary. Those roles are not always held by the same person, and a death can affect them differently. If you own an annuity, keep the actual contract and current beneficiary confirmation rather than just the annual statement. The statement may show a value without explaining exactly which event triggers a payment or which election becomes irrevocable.
Taxes on an Inherited Annuity
Taxes are another reason to review the options before requesting a payout. An inherited annuity is not automatically tax-free like many life insurance death benefits. For a deferred annuity purchased with after-tax money, amounts above the owner’s investment in the contract may be taxable, and different rules can apply to retirement-plan annuities. Available payment options and deadlines depend on the arrangement and recipient. The accountant should review the tax consequences before a beneficiary chooses how to receive the money. See IRS pension and annuity tax guidance.
What to Do After a Death
After a death, contact the plan administrator or insurance company and request the survivor or death-benefit claim instructions. Expect to provide a death certificate and information establishing the claimant’s entitlement. If a payment arrives after death, verify whether it was properly payable before spending it. The date it reached the bank does not necessarily establish whether the recipient was entitled to keep it.
Ask What Your Family Would Receive Today
For planning purposes, ask one direct question: what would my spouse or family receive if I died under the arrangement in place today? Have the administrator or insurer explain the answer, and bring that information into the estate planning discussion. We can coordinate the legal plan while your financial adviser evaluates the income choices and your accountant addresses taxes. Each of us needs the same facts so the family is not counting on income that will disappear.
Start with a free 15-minute consult call with Nicole Ott, our Lead Intake Coordinator. Tell her what kind of pension or annuity is involved and whether you are planning ahead or handling a claim after a death. That is usually enough for us to say what to do next.
