Secure Your Future

Consider TRS pension option before looking into insurance program alternative

Apr 23, 2009 4:24 PM

One of the most important decisions a member has to make at retirement is whether to take Maximum Retirement Allowance, which provides no benefits for a member’s heirs or beneficiaries, or select an option which may provide a benefit for a member’s heirs or beneficiaries. 

Insurance companies are proposing alternatives to members. But, before you choose an insurance company option, be sure to know all the facts.

Earlier this year, we had a column which described the various options.

Members thinking about retirement should carefully research the matter and consider their choices.  In addition to the Nov. 20 article in the New York Teacher, information is available in the UFT’s Pension Handbook and TRS’ Summary Plan Description.

UFT consultants are frequently asked how the coverages provided by TRS’ various options compare with what is available from private insurance.  To answer this and other questions, let’s look at some of the matters a prospective retiree should consider.

If you are trying to decide between the maximum pension and one of the other available options, there are several factors you should take into account.  They include:

• Your complete financial situation (assets and liabilities).
• Your beneficiary’s financial dependence on you and his or her ability to manage funds.
• Future Social Security benefits due to you and your beneficiary.
• The standard of living you and your beneficiary wish to maintain in retirement.
• Your health and the health of your beneficiary.

“Pension Max” is being pitched by salespeople in the insurance industry.  They advise members to choose the maximum retirement allowance from TRS instead of an option and then use the difference between the maximum and the reduced optional allowance to buy an insurance policy.

It sounds inviting, but many accountants, actuaries and independent financial authors say “Pension Max” is full of pitfalls.  A major problem is that the after-tax difference between the maximum and an option is rarely large enough to purchase an adequate insurance policy.  The insurance premium, in addition to providing the benefit, must cover such items as overhead and profit for the insurance company and a commission for the sales agent.

Then, of course, there is the investment risk.  Will the surviving spouse, at an extraordinarily stressful time, be able to invest prudently a lump-sum payout in a manner to provide a guaranteed lifetime income?  After all, your retirement allowance is a guaranteed lifetime income.  Your spouse may be frail or in poor health.  How many of you, now in good health, with no special stress, feel confident that you could invest a lump sum of money in an appropriate manner to last a lifetime?

Joint survivor options through TRS have the additional benefit of being protected by supplementation.  UFT-supported legislation requires that one-half of any supplementation received by a retiree be passed on to the spouse if the retiree predeceases the spouse.  This provides inflation protection for the surviving spouse.

To be sure, there are some good features to life insurance which may make it advantageous in certain situations: some people may be expert investors and a lump sum would give such recipients more control and responsibility over the investment of the proceeds; money may go to more than one beneficiary; the beneficiary may be changed if the beneficiary predeceases the retiree; and coverage can be canceled at any time, simply by not paying the premium.

Important Warning

But no one considering private insurance should eliminate a possible TRS option before he or she has been approved for private insurance.  An insurance company can reject an application for health reasons.  TRS options are available to all regardless of the health status at retirement.

You may apply for a TRS option up to one business day before retirement.  Once retirement has started, the retiree may change an option within 30 days of the retirement date.  Thereafter, options cannot, under ordinary circumstances, be changed or discontinued.

If you are undecided about whether to take “Pension Max” or an option, here are some factors you should consider:

Will the policy be less costly than the option on an after-tax basis?

Under which plan do you get greater take-home pay while both retiree and spouse are alive?

Will the insurance proceeds buy your spouse a lifetime income at least equal to the amount that could be received from a TRS option regardless of when you die?  The payout from an insurance policy is considerably lower when the retiree dies early.

Will the insurance agent put all risks in writing so you can prove what you were told?  It is possible that if annuity rates fall or policy costs rise you will leave an insufficiently protected spouse.

The retirement allowance and payments to a beneficiary are not subject to New York City or New York State income taxes. (If you plan to live in another state, check whether the new state will tax your retirement allowance.)

You should get your retirement system estimates from the UFT at your final consultation.  If you wish to compare the retirement system’s figures to private insurance figures, consult a reputable private insurance salesperson or a reputable financial planner.  You should not ask an insurance salesperson to calculate TRS’ figures, nor should you ask a UFT pension consultant the cost of insurance policy.

Electronic Withdrawals

As of April 1, eligible members have the option to receive withdrawals electronically from their Qualified Pension Plan (QPP) and Tax-Deferred Annuity (TDA) accounts.

Electronic Fund Transfer (EFT) will be available for TDA withdrawals, TDA hardship withdrawals, QPP excess withdrawals and QPP total withdrawals.  (EFT is already available for distribution of loans and TDA Required Minimum Distributions, as well as monthly benefits.)

EFT allows members’ accounts to be credited on the payment date – so members don’t have to worry about delayed, lost or stolen checks.

In-service members may be eligible to receive withdrawals by EFT in the same account where they receive their pay as long as they have been paid through direct deposit on the New York City payroll within the last three months, for work in the position that entitles them to TRS membership.  (At this time, charter school members cannot receive payments by EFT.)

Retirees with TDA Deferral status may be eligible to receive TDA withdrawals by EFT in the same account their retirement allowance payments are deposited electronically.

New Forms and Procedures

For enhanced security, members may no longer place withdrawal checks on hold for pickup at TRS as of March 31; they may instead choose to receive payments by EFT or by checks mailed to their home address.

TRS has updated applicable forms to reflect the EFT option.  Members who file an outdated form after March 31 and request to have their check held for pickup at TRS would instead receive the check by mail.

VARIABLE ANNUITY
The unit value is compiled during the latter part of each month. Recent values are:
	VARIABLE A	VARIABLE B
February	39,175	19,492
March	35,364	19,483
April	37,951	19,477

“Secure your future” is compiled and written by Mel Aaronson, Sandra March and Mona Romain, teacher-members of the NYC Teachers’ Retirement Board. For further information on items discussed, call your UFT borough office or the TRS.BRONX: 1-718-379-6200; BROOKLYN: 1-718-852-4900; MANHATTAN: 1-212-598-6800; QUEENS: 1-718-275-4400; STATEN ISLAND: 1-718-605-1400; Teachers’ Retirement System: 1-888-8NYC-TRS (692-877), www.trs.nyc.ny.us.