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What Happens To My Pension If I Die Before I Retire?

Updated On Aug 13, 2021

A pension is a source of income when you retire and stop working. Pensions, often known as defined benefit plans, pay you a certain sum each month. Some pension plans allow you to receive a lump sum to invest as you see fit. The longer you work, the more you can anticipate getting from your pension when you retire. If you die before reaching retirement age, the money in your pension is not lost. It will be passed on to your heirs or beneficiaries.

However, there are different conclusions for your unused pension plan which depend on the type of the plan, duration, premium and other factors combined. Here is a list of the different types of pensions and what happens to your pension account in case you die before you retire.

In Case of Pension Plan Vesting

Most pensions, both public and private, require that you first be vested in the pension plan. Your company requires you to work a certain number of years before you are eligible for full pension benefits. For example, your employer may require you to work three years before being eligible for your pension, at which point you will be completely vested. Alternatively, the employer may require five years of service before you are fully invested, but you are entitled to 20% of full benefits after a year.

In Case of Pension Plan Beneficiaries

When you participate in your company's pension plan, you name beneficiaries to receive your pension if you die before you can collect it. You can name a single beneficiary or numerous beneficiaries, and you can specify how much of your pension each beneficiary will receive. For example, if you have a spouse and two children designated as beneficiaries, you might pay half of the pension to your husband and half to each of the children. If you are married and designate a beneficiary other than your spouse, most plans need your spouse to sign a waiver attesting to your acceptance of this arrangement. You may also need to specify a supplementary benefit.

In Case of No Beneficiary Pension Plan

If you do not choose a beneficiary for your pension, or if you do not update the information and the beneficiary you initially chose dies, your pension will be distributed in accordance with the pension plan's rules. Some plans will automatically transfer the pension to your spouse or, if you are not married at the time of your death, to your children or next of kin. In other situations, the pension will be included in your inheritance and dispersed in accordance with the stipulations of your will.

In Case of Pension Plan Beneficiary Payout

Each pension plan establishes its own regulations for distributing funds to beneficiaries. Some will make a one-time payment. Others allow the beneficiary to receive funds in equal instalments over a period of years. If you're married, this can offer an income for your spouse for a number of years. Your beneficiary must declare the pension proceeds as income on her taxes.

Take Away

Every pension plan has benefits, drawbacks, and strings attached. You should consider the impact and likelihood of passing it on to your beneficiary if you die before retiring. If you have a good chance of living a long life, (the annuity) could be the perk that provides you with the most income. If your health isn't good and you won't live a long time, you could prefer the lump sum or combined life insurance even before retirement.

Must Read: 

All About National Pension Schemes

Top 9 Best Retirement Plans In 2021

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.

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