Which Pension Payout Option Is Best for Couples?

Choose between single-life and joint-and-survivor annuities or lump-sum payments

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When you retire and you are vested in your employer defined-benefit pension plan, you will have to choose how you want to receive your pension benefits. If you're married, it's important to understand the benefits that you and your spouse are entitled to under each payment structure so that you can decide which pension option is best for your joint financial needs.

Types of Pension Payouts

Under a defined-benefit pension plan, retirees can opt to receive payments from the plan in the form of an annuity (monthly payments) or a lump sum (a one-time payment of the whole amount you are owed).

In general, annuities are preferable for pensioners who believe that they and their spouse will exceed the average life expectancy. This is because they feel confident that will live to receive future installments of the pension.

In contrast, a lump sum may be a good option for people who don't believe they will live past the average age, usually because of health issues. Getting all the money up-front can relieve the worry that a retiree won't live to see future payouts.

Annuity Distribution Options

There are several types of annuity pension payouts to consider, each with pros and cons.

Choose a single-life plan. This annuity generally results in the highest monthly payout. But payments cease upon your death, and there are no benefits for the surviving spouse. Your spouse will be in a precarious financial situation if he depends on the income, making this an unsuitable option for retirees whose priority is income security for their spouse.

Opt for a single-life plan with a certain term. Under this annuity, you receive payments for a preset number of years at a minimum, but they continue as long as you live. If you die before the preset term, your beneficiaries will receive your payouts for the remainder of the term. This can be an appropriate option if your spouse is considerably older than you.

Select a 50% joint-and-survivor plan. With this annuity, you will get a payout for as long as you live. Once you pass away, your spouse will receive payments for the rest of her life, but it will only amount to 50% of your original payment. Monthly payments are lower than under a single-life annuity because you're covering both you and your spouse. However, you get the peace of mind of knowing that your spouse will have some form of income when you die.

Pick a 100% joint-and-survivor plan. Your monthly payout will be the lowest with this annuity that pays you as long as you live. Upon your death, your surviving spouse will receive 100% of your payout for life. This annuity provides the greatest measure of security that your surviving spouse will be income-secure in retirement.

Sample Pension Payout Choices

This example of a retiree's pension benefit distribution choices can help you determine which pension option is best for you:

Retiree Sara: Female age 62 with 30 years of service

  • Single life: $1,741
  • Single life with a 10-year certain term: $1,620
  • 50% joint and survivor: $1,560
  • 100% joint and survivor: $1,414
  • Lump sum: $256,660

If Sara chooses the single-life option, she will receive $1,741 per month for as long as she lives. But the monthly payout will cease when she dies, so if she lives only one year, no additional funds will be paid out. In addition, if she is married, her spouse will not receive a survivor benefit.

If Sara chooses the single-life plan with a certain term of 10 years, a payment of $1,620 per month is guaranteed to be paid out for a minimum of 10 years and would continue as long as Sara lives. This means that if Sara passes away after one year, the payments would continue to a spouse or beneficiary through year 10 as measured from the first payment.

If Sara chooses the 50% joint-and-survivor annuity, she will receive $1,560 per month as long as she lives. Upon her death, her spouse would receive half that amount—$780 per month—as long as he lives.

If Sara chooses the 100% joint-and-survivor annuity, she and her spouse will receive $1,414 per month for as long as either of them is still alive. With this option, Sara would get $327 less a month than she would receive under the single-life option. This $327 per month reduction in benefit is similar to buying life insurance for her spouse so that he will continue to have income upon her death.

Sara could also choose a lump sum of $256,660 instead of one of the annuity options. But before doing so, she should consider her and her spouse's life expectancy and compare the lump sum with the cumulative payouts she would receive with different annuities. If Sara lives for 20 years, she alone would collect $374,400 in total ($1,560 multiplied by 240 months) on a 50% joint-and-survivor annuity, which is over $117,000 more than the lump sum.

If you have an above-average life expectancy, you could receive considerably less in cumulative payouts over the years if you take a lump-sum payment.

Evaluating a Joint-and-Survivor Annuity Versus Life Insurance

If you want to guarantee that your spouse has income upon your death, you may not want to take the traditional single-life option. However, if there is a monthly employee investment cost associated with using a pension plan to provide an annuity benefit to her spouse, you may choose to get life insurance quotes to compare the monthly cost of using the pension plan versus the cost of buying your own outside life insurance.

Although you may be healthy and insurable, buying outside life insurance involves more risk than pensions even if some cost savings can be achieved. You may miss premium payments because of illness, moving, and/or age-related cognitive decline. The life insurance could be canceled as a result of non-payment. When a person passes, the insurance needed by a spouse wouldn't be available. The insurance that is often built into a pension plan can offer greater security when considering risks like cognitive decline and illness.​

If you do look into life insurance, get life insurance quotes online, talk to a life insurance agent, or use the services of a fee-only life insurance agent or fee-only financial advisor. If you work with an agent, remember that the agent may not provide an objective analysis.

The Bottom Line

When deciding which pension payout option is best for you and your spouse, consider your life expectancy, potential beneficiaries (and their life expectancies), and your income needs in retirement to determine whether an annuity or a lump-sum will better sustain your retirement.

If you opt for an annuity, evaluate the pros and cons of a single-life versus a joint-and-survivor annuity. The traditional single-life annuity won't provide benefits to a survivor, making it a poor choice if your goal is to provide income to your spouse after your death. However, a single-life period-certain annuity or a joint-and-survivor annuity can both result in income passing on to beneficiaries so that they have an income they can depend on in retirement.