Once an employee contributes in the pension plan, contributions or ceases to make contributions until retirement, unless the plan is terminated, or his or her employment ceases. If the employee ends employment prior to vesting period, will face locked-in, meaning that he or she cannot receive a cash settlement. Other options now permitted in most jurisdictions include transferring the funds directly into the pension fund of a new employer, or into a locked-in retirement account. They often do the provision of a life income through a deferred life annuity, either as a paid-up contract under the employer’s group annuity plan or as an individual annuity contract purchased from a life insurer at the time of termination of employment.
Distribution at Death: While CCRA restricts the benefits that can be pre-funded, at retirement, the pension plan can be amended to provide the most generous terms possible. The distribution of pension funds upon the death of a member depends on the jurisdiction in which the fund operates, and whether the death occurred:
- Death Prior to Retirement: The federal Pension Benefits Standards Act (PBSA) requires that the pre-retirement death benefit be at least equal to the value of the deceased member’s vested termination benefits accrued after 1986 and until death, including both employer and employee contributions, plus interest.
- Death prior to early retirement age: If death occurs over ten years prior to the member’s normal retirement age, the surviving spouse or common-law partner may opt to receive100% of the commuted value of the deceased’s post-1986 benefits. Alternatively, the spouse or common-law partner may transfer the commuted value of the deceased’s accrued pension to a financial institution for the purpose of purchasing an immediate or deferred annuity.
- Death after early retirement age: However, if death occurs within ten years of normal retirement age, they deem the deceased to have been eligible for a reduced early retirement pension, payable on a joint and last survivor basis. Here, the spouse or common-law partner would receive at least 60% of the reduced early retirement pension or if there is no surviving spouse or common-law partner, the death benefit to a designated beneficiary or estate must at least equal the employee’s contributions plus interest.
- Death After Retirement: The disposition of benefits when death occurs after retirement depends on the pension distribution and is described in Retirement Distribution Options.
Retirement Distribution Options
All pension plans must define the normal pension, which specifies what form the pension payments take and what benefits a member’s beneficiary or estate receives if the member dies after retirement. The most registered pension plans by providing options in which the monthly pension benefit may be received by the spouse or the common-law partners after their death giving no additional cost.
- Refund Annuities: A refund annuity is a plan that includes a qualification that ensures, employees received total pension benefits to the date of death are at least equal to the contributions plus interest, then the balance is paid in a lump sum to the beneficiary or estate.
- Straight-life Annuities: In a non-contributory plan, Straight-life annuities are still used for single beneficiaries, where a pension is payable for the lifetime of the member but not permitted for the spouse or common-law partners after the member dies.
- Annuities with Guaranteed Period: Some pensions are having a guaranteed annuity, with a provision that it guarantees payments to continue for a minimum of five or ten years, even if death occurs before the end of the guaranteed period.
- Joint and Last Survivor Annuities: The joint and last survivor provision is another form of pension common in the public sector because it assures that both the member and his or her spouse or common-law partner receive continue payments throughout of their lifetimes. In some plans, the payments to the surviving spouse or common-law partner are reduced, compared to a straight-life annuity. However, the size of the monthly reduction benefit depends on the ages of both the member and his or her spouse or common-law partner. In most jurisdictions, some public sector made it mandatory married couples to be paid as a joint and last survivor annuity for their spouse or common-law partner.
- Variable Annuities and Cost of Living Supplements: With a variable annuity, the number of pension payments may be adequate at retirement, over a few years, following the market value erode the purchasing power of those funds. To overcome this drawback of pensions is to change the pension legislation to permit at least part of all contributions to be placed in a segregated fund of equity investments or we can contribute with the companies, offer fully indexed annuities as an optional form of settlement for pension plan proceeds. However, there is no real evidence that stock market downfall and increase reflect the reliable changes in the cost of living.
Though having uncertainty and high costs involved, in some public sectors employers administering defined benefit plans are reluctant to offer indexed pensions because of the high cost of providing indexation on top of the prescribed benefits and as these plans are funded in advance by employee and employer contributions. Private plans are more likely to provide ad hoc supplements to pensioners, with a value of 2% to 3% for each year since retirement. We have estimated that the cost of an indexed plan with the indexation of 5% per year would account for 25% to 33% of total costs. However, the benefit is not guaranteed
- Cash Options: In most cases, they cannot commute a pension to cash at retirement but has the purpose to provide a continuous income upon retirement. Most jurisdictions prohibit a cash settlement unless the pension is less than 2% of the Yearly Maximum Pensionable Earnings if the member has a short life expectancy because of disability or poor health.