Secure Your Future
It’s important to understand your pension options
Nov 20, 2008 2:11 PM
In a recent issue we discussed the protection that members of the Teachers’ Retirement System provide for their beneficiaries in the event of death before retirement. In this column, we discuss the use of the optional forms of retirement allowance (options) available to provide for dependents, heirs and beneficiaries after retirement.
A retiring TRS member can choose between a maximum pension, which makes little or no provision for heirs or beneficiaries, and an option. By selecting an option, the retiree elects to collect a reduced retirement allowance in order to make some provision for beneficiaries. Once the choice is made, it generally cannot be changed.
The choice of maximum or an option depends on how a person feels about money and mortality. In order to help make that decision, a retiree should consider, among other things, the following:
• What are the financial needs of the retiree and beneficiary?
• What is the health of the retiree and beneficiary?
• What is the age of the retiree and beneficiary?
After considering such questions, a member must examine the choices available from TRS. Different options are available under the different tiers. The costs of the options are based on the age of the retiree and, in the case of joint-survivor options (which provide lifetime benefits for two), on the age of the beneficiary. At the UFT final pension consultation, the member will get estimates of how much the retiree will be paid under maximum as well as how much will be paid under appropriate options. Here are the most common elections available under each tier.
Tier I
Option I (Unmodified Initial Reserve): This provides that, upon the death of a retired member, the beneficiary will receive the remainder of the retirement reserve. It provides the largest benefit when the member dies shortly after retirement, but the reserves generally are exhausted in 10 to 12 years. At that point, there is no further protection for the beneficiary; the pensioner continues to receive the reduced retirement allowance for life.
Under this option, more than one beneficiary may be named and the beneficiary may be changed at any time.
Option I (Modified Initial Reserve): Following the adoption of new actuarial tables based on a Supreme Court decision on gender-neutral pension benefits, a variation of Option 1 became available. Under this option, the form of the benefit is the same as described under Option 1 (Unmodified Initial Reserve) except that the reserve is higher and the annual benefit is lower. This results in the reserve lasting for a longer period of time.
Option II: This is known as a joint-survivor option and provides that upon the death of the retired member the beneficiary will get a lifetime allowance equal to that received by the retiree. The age of the beneficiary is a factor in computing the cost. The beneficiary may not be changed after retirement. If the beneficiary predeceases the retiree, the retiree continues to collect the reduced amount for life.
Option III: This option is similar to Option II, except that the beneficiary who survives a retiree will get half as much as the retiree was receiving. Since it provides less protection, it costs less than Option II.
Option IV-2 (Pop-up Option): This option is similar to Option II, except that if the beneficiary dies first the retiree’s allowance reverts to what it would have been had he or she retired on maximum. It is, of course, more costly than Option II; that is, it causes a greater reduction in the retirement allowance.
Option IV-3 (Pop-up Option): This option is similar to Option III, except that if the beneficiary dies before the retiree, the retiree’s allowance reverts to what it would have been had he or she retired on maximum. It is, of course, more costly than Option III.
Option IV-a: This option is similar to Options II and III in that a lifelong allowance is provided for a beneficiary. It provides that the member may elect to have the beneficiary receive an allowance of one-fourth, or some other fraction, of the retiree’s retirement allowance. As an alternative, the retiree may elect to have the beneficiary receive a specified dollar amount or a specified number of variable units as an allowance.
The benefit may not be:
1. larger than the allowance paid to the retiring member, nor
2. less than $100 per month.
If an allowance exceeding the limitations above is selected, TRS will adjust the payment to be either the largest amount consistent with (1) or the smallest amount consistent with (2).
Option IV-4a: This is Option IV-a with a “pop-up” feature so that if the beneficiary dies first the retiree’s benefit will rise to the maximum.
Option IV-b: This option provides that upon the death of the retiree the beneficiary will receive a lump sum, a stated amount of money (or number of variable units, if the retiree participates in the variable annuity program). It is limited to the amount that can be provided by the money in the retiree’s fixed and variable annuity savings fund account. Option IV-b on an annuitized TDA is limited to half of the amount in the TDA account.
A beneficiary may be changed at any time. Under this option, more than one beneficiary may be named. If the beneficiary dies before the retiree, the retiree may opt to collect an unreduced retirement allowance or name a new beneficiary.
Retirement death benefit
In the case of a Tier II, III or IV member covered by Death Benefit (2), even if a member selects the maximum retirement allowance there may be a benefit payable to the estate or beneficiary of the member.
During the first year of retirement, the benefit is 50 percent of the benefit covering the member at retirement.
During the second year of retirement, the benefit is 25 percent of the benefit covering the member at retirement.
Beginning with the third year and thereafter, the benefit is 10 percent of any benefit payable at age 60, or the benefit payable at the time of retirement if the member retired before age 60.
Tier II
Option I: This applies only to the annuity portion of the regular retirement allowance and to the annuitized TDA.
This option provides that upon the death of a retiree, the beneficiary will receive the total of the annuity reserves, diminished by the amount already paid to the retiree as retirement allowance. It provides the largest benefit when the member dies shortly after retirement, but the reserves generally are exhausted in 10 to 12 years. Thereafter, although there is no further protection for a beneficiary, the pensioner continues to receive the reduced retirement allowance for life.
Under this option, more than one beneficiary may be named and the beneficiary may be changed at any time.
Options II, III, IV-2, IV-3 and IV-b: They are the same as for Tier I.
Option IV-d (Five-Year Certain Option): This provides that a retirement allowance be paid to the retiree for life, but should he or she live fewer than five years after retirement, the designated beneficiary will receive the same retirement allowance for the remainder of the five-year period. After five years, there is no protection provided a beneficiary. The beneficiary may be changed after retirement.
Option IV-e (10-Year Certain Option): This operates in the same manner as the five-year option, except that the period of protection is 10 years. Since there is more protection, the cost is greater.
Tier III/IV
Option I: This provides that upon the death of a member the beneficiary will get a lifetime retirement allowance equal to that received by the retiree. The age of the beneficiary is a factor in computing the cost. The beneficiary may not be changed after retirement. If the beneficiary predeceases the retiree, the retiree continues to collect the reduced amount for life.
Option II: This provides that upon a Tier III member’s death, the beneficiary will get a lifetime retirement allowance equal to a percentage, in multiples of 10 percent, of the allowance received by the retiree. A Tier IV member can give the beneficiary an allowance in multiples of 25 percent. In each case, the percentage amount must be selected at the time of retirement. Since the beneficiary’s age is a factor in computing the cost, the beneficiary may not be changed after retirement. If the beneficiary predeceases the retiree, the retiree continues to collect the reduced amount for life.
Option III (Five-Year Certain Option): This provides that a retirement allowance be paid to a retiree for life but should the retiree live for fewer than five years after retirement the designated beneficiary will receive the same retirement allowance for the remainder of the five-year period. After five years, there is no protection provided to a beneficiary. The beneficiary may be changed after retirement.
Option IV (10-Year Certain Option): This operates in the same manner as the five-year certain option, except that the period of protection is 10 years. Since there is more protection, the cost is greater.
Option V (Pop-up Option): This is similar to Option I and Option II (at a 50 percent benefit), except that if the beneficiary dies before the retiree, the retiree’s allowance reverts to what it would have been had he or she retired on maximum. It causes a greater reduction in the retirement allowance. The beneficiary may not be changed after retirement.
Third Quarter Account Statements (QAS)
This month TRS mailed out the third quarter QAS. This statement provides account balances for members’ accounts as of Sept. 30, 2008. If you did not receive your statement, contact TRS.
Welcome Kits
You should by now have received your New Member Welcome Kit. TRS has started deducting your contributions to the Qualified Pension Plan (QPP). These deductions pay for your share of the defined benefit pension you will receive when you retire.
The Welcome Kit contains a Summary Plan Description (SPD) that describes the benefits TRS provides both during your career and at retirement. A careful reading of the SPD will give you an appreciation for a secure future that most Americans no longer have.
In order to assure your future, you must fill in and file at TRS:
• a TRS enrollment application including a record of previous employment in New York City or State public service;
• a QPP designation of beneficiary form;
• a proof of date-of-birth;
• a TDA enrollment application if you wish to join this voluntary supplementary savings program at this time;
• a TDA designation of beneficiary if you enroll in the TDA.
If you file all required forms at this time, your TRS benefits will be assured for you and your loved ones.
“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.
