I can choose a single life annuity for my pension or a joint and survivor annuity that makes payments to my spouse when I die. Which is better?

I can choose a single life annuity for my pension or a joint and survivor annuity that makes payments to my spouse when I die. Which is better?

Answer:

It depends on your circumstances.

If you’re not married, the single life annuity is clearly the best choice (and may be your only option). You’ll receive the maximum payout from your pension during your life, and all benefits will cease when you die. This option may even make sense if you’re married (assuming that you have other ways to take care of your surviving spouse, such as investments or retirement plan assets), and the difference between the higher-paying single life annuity and the joint and survivor annuity is very great. (The joint and survivor annuity benefits paid to you during your life will be smaller than if you elected a single life annuity, because they are payable as long as either person is alive.)

One common strategy is to choose the single life annuity and buy life insurance to protect your spouse, using some or all of the difference in benefits between the higher-paying single life annuity and the joint and survivor annuity to pay the premiums. That way, you may maximize your pension benefits while you are alive, and your spouse will receive insurance proceeds when you die that may be more valuable than what he or she would get under the joint and survivor annuity option. You may need a financial professional to help you assess whether this strategy is right for you.

But you may be better off choosing the joint and survivor annuity. This might be the case if your assets are insufficient to meet your surviving spouse’s needs, if you can’t obtain the insurance coverage you need (or that coverage is too expensive), or if the difference between the higher-paying single life annuity and the joint and survivor annuity is small. This option would enable your spouse to receive pension survivor benefits after you die (usually a percentage of your full retirement benefit), as well as provide your spouse with guaranteed income until his or her death. Electing a joint and survivor annuity may also enable your surviving spouse to continue to receive medical coverage from your former employer after your death, if the plan allows.

One final note: If you’re married, most plans will only allow you to choose a single life annuity if your spouse waives the joint and survivor annuity. You and your spouse should discuss your options and agree on the one that will best meet the needs of both of you. This is a complicated decision, so get professional guidance before you make your choice.