What is it?
Often a pension needs to last two lifetimes; the pensioner and that of the spouse.

All defined benefit plans have a variety of pension benefit payment options to satisfy the diverse needs and circumstances of its pensioners. Typically, in the absense of a different election, the automatic pension income option is the joint survivor option providing an income for the employee during his/her lifetime and  a lesser amount on going for the surviving spouse.

Often the income option actuaries use to value the plan (for funding sufficiency) is based on the life option with little or no guaranteed payments. All other payment options are adjusted based on this "valuation option" such that regardless of the option chosen the Present Value of the Plan's future income commitments are equitable.

Often the difference between the mandated automatic payment option that has income guaranteed to a surviving spouse and the maximum income option [ the option with little or no guarantees] can be as much as 25 or 30% depending on a various factors.

Pension maximization concept has two components, first, the pensioner chooses the highest payment option [the one that guarantees an income for life of the pensioner but not his spouse] and second, finances the income of the surviving spouse with a life insurance policy.

When needed, the TAX Free life insurance proceeds are converted to an annuity for the life of the surviving spouse.

[A personal Pension]

TYPICAL RETIREMENT
Employee Age: 65 Male - nonsmoker Spouse Age: 62 Female NonSmoker Last Year's Income: $35,000 or $2,917
Pension Option	Annual	Monthly
Survivor Pension	$20,825	$1,735	A
Widow's pension	$10,412	$868	B
Best Pension Option	$24,500	$2,042	C
Difference	$3,675	$306	D
PENSION MAX*

Advantages of Pension Maximization to Employee

• 1) Increases monthly pension income significantly while both pensioner and spouse are alive. The monthly pension cheque can often increase by 20 - 25%, although 15% is most typical. On a $1500 a month that can be $375 or more. That's a hefty insurance premium to pay to guarantee a spousal income!

   

• 2) Avoids locking in a survivor pension income, if there is no surviving spouse. Suppose you chose the last survivor pension cutting your monthly income by $250 per month to guarantee that you spouse has a portion of your pension continue after you die. Three months after you retire, your spouse takes ill and a short time later succumbs to the illness. There is no longer a need to provide a survivor pension, yet you gave up $250 per month for the rest of your life.

   

• 3) Provides income options not otherwise available or practical.

Advantages of Pension Maximization to Employer.

 

• 1) Provides a no cost mechanism to create flexibility to pension plan.

• 2) Creates opportunity to create a forum to explain the detail of the Pension Plan.

• 3) Motivates employees to review their retirement saving strategy early enough to allow for strategic adjustment.

• 4) Places employer in a socially positive light with employees.

If @ 40 he purchased $125,000 of  life insurance on his life for $80.00 per month payable to age 65* he could have opted for 
"Best Pension Option" increasing his payments by $306 monthly. On his death $111,910 of insurance proceeds would be used to purchase a "Personal Pension" or an annuity for the surviving spouse. to produce an income of $867.70 monthly for her lifetime. (This illustration assumes the worst, the retired employee (pensioner) dies in the first year of retirement.)

Additional advantages:

• The longer the pensioner lives, the more income he and the spouse jointly collect under the "Best Pension Option" and

• the higher the survivor benefit becomes for the spouse.

• The after tax income from the personal pension created from the life insurance proceeds is higher than the Company pension's survivor option income because a significant part of the income from the personal pension is a return of capital, and not subject to  tax.

  • Again, the longer the pensioner survives the larger the non-taxable portion of the survivor's "personal pension" income becomes under Pension Maximization.

  Suppose, the spouse did not outlive the pensioner.

  • There was no need for the survivor pension option, and the life insurance policy may be surrendered for cash if not needed for other protection thus further enhancing the pensioner's income.

  • On the other hand it may be kept in force to augment the pensioner's estate.  The principal works equally well using a personal pension like  RRSP and other sources of retirement income. The principal is to  use life insurance as the funding source for the survivor pension.

  • The best option is to purchase and pay for the necessary life insurance prior to retirement; this way the pension is Maximized to the fullest.

* Based on a Universal Life Plan using a lifetime yield assumption of 6% and the cost of protection was valid at time of writing but can vary with passage of time.