Pensions – What You Need to Know

Most employers offer a retirement plan for their employees, but they may not offer a pension. Additionally, employers may offer different kinds of retirement plans for different employees. Call your employer’s human resources department and ask for a copy of your retirement plan to see what kind of plan you have.

You cannot start collecting your pension until you retire.

Most pension plans have a vesting requirement. That is, you usually must work for a certain number of years to become “fully vested” in a pension plan. Fully vested means you are able to receive full benefits when you retire.

For public pension plans, vesting occurs according to the terms of the plan, For private pension plans, an employee must be fully vested in the plan after working for the employer for 10 years. Many employers allow their employees to become fully vested sooner.

Some employers use a cliff vesting schedule. In cliff vesting, you become fully vested only after a certain number of years. This means that you will not qualify for a pension until you work for your employer for at least that many years.

Example: Thomas works at Company D, which has a cliff vesting schedule. Employees are only vested in the pension plan after five years.

Some employers offer a graduated vesting schedule. Under this schedule, as you work for your employer longer, you qualify for larger and larger portions of your pension until you are fully vested.

Example: Susan works at Company E, which has a graduated vesting schedule. Employees are fully vested after eight years.

You can see if you are vested by reading your Summary Plan Description or by calling the human resources department at your work.

You cannot collect on a pension until you have retired from the employer through which you will receive the pension. This means that you will no longer be able to work for that employer. However, you are able to work for another employer.

Example: Ron works for Company A. Ron retired from Company A and began collecting his pension. Ron cannot work for Company A now, but can work for Company B.

When you reach an age when you can start collecting your pension, your employer will send you a package explaining your retirement options. You can choose an Early Retirement option, or wait until you can collect at a different retirement age. Remember that you can request a Summary Plan Description or a benefit calculation at any time.

It depends on the pension plan. Almost all plans allow you to leave your pension to your spouse when you die. This is called a surviving spouse plan. If you die without a spouse, or if your spouse dies before you, your money will not go to anyone.

Some plans allow you to choose a designated beneficiary who will get your pension when you die. Your designated beneficiary does not have to be your spouse or child. It can be anyone you want. You may be able to have more than one designated beneficiary or to have back-up beneficiaries. You will need to consult your plan to determine how to leave your pension to a designated beneficiary.

Your employer doesn’t have to offer a surviving spouse plan or a designated beneficiary option.  

If you want to leave your pension to your spouse or designated beneficiary, you should look at the options your plan offers. You may have to take a lower pension payment if you want to leave some of your money to someone.

Example: Alice has a pension with Company A. She wants to make sure that her husband, Ben, will be able to collect her pension if she dies before him. Company A gives Alice some options.

If you haven’t begun collecting your pension yet and you and your spouse divorce, or your spouse or designated beneficiary dies, you will need to update your pension plan. Otherwise, the same person will still be entitled to your pension benefit after you die. If circumstances change after you’ve begun collecting your pension, you may not be able to update your plan.

Learn more on our Marriage, Divorce and Pensions page.

Your pension can be paid in many ways, but it is usually paid as a monthly annuity (payment).

Your employer may allow you to take your pension as a one-time, lump-sum payment. This means that all your pension is paid at once. However, it is up to your employer to offer you a lump sum. No one can force your employer to offer to pay you all at once. An employer can offer lump sums to some employees and not to others.

Your employer will use different factors to decide how much money you get. These factors may include how long you worked at your job, the position you held, how much you earned and at what age you retired. Your employer will set the early retirement age and the normal retirement age in your pension plan. Your employer must explain how they calculate pension payments in the Summary Plan Description.

Example: Dave works for Company B. Company B’s pension plan offers Dave three pension retirement options.

In this example, if Dave retires at 57, he would receive the same amount of money that he would get if he retired at age 55.

Unless your pension plan says so, you will not get more money if you start getting your pension after your “normal retirement age” (the age your company expects you to retire). In the example above, if you choose to retire at 68, 70 or even 80 years of age, your monthly payment will be the same as if you had retired at 65, the normal retirement age for Company B.

A benefit calculation sheet shows how your employer calculated your pension and what factors they used. You can ask for a benefit calculation at any time, including before you start receiving your pension.

There are many kinds of pensions. Most plans fall into one of two categories: single-employer plans or multi-employer plans. All plans are either private or public.

You have a single-employer plan if you work for one company that provides a pension plan for its employees.

Multi-employer plans cover workers who do not work for the same employer. Labor unions often use multi-employer plans to provide retirement benefits to their members.

A pension plan will either be private or public. If you work for a private company, you will have a private pension plan. If you work for a local government employer or state employer, you will have a public pension. Some professions with public pensions are public school teachers, city and state police officers, and judges.

Your employer usually tells you about your retirement benefit options when you are hired. However, you can always call the human resources department at your work to get information or to ask for a Summary Plan Description.

When you are close to retirement age, the Social Security Administration will send you a form called a Notice of Potential Private Pension Benefit. This form will tell you the type and amount of benefit you may be able to receive. It will also tell you who is administering your pension (who holds your money and gives it to you) or who you should contact to start receiving your pension.

You don’t have to wait to hear from the Social Security Administration. You can ask them for a Notice of Potential Private Pension Benefit at any time.

We have put together a packet to help you request information about your pension. The packet includes:

• a page telling you what to do
• a sample request letter
• a request letter that you can fill out and mail to Social Security
• a form like the one Social Security will send you after they get your request letter

This is very common. Companies often go out of business, change names or join other companies. You shouldn’t worry! Your pension is protected from the employer’s actions and business decisions.

When a company joins with another company or is bought by another company, the new company will most likely assume the old company’s pension responsibilities (the duty to pay the pension money to employees).

Example 1: Company A joined with Company B to form the new Company C. Company C is responsible for the pension plans of both Company A and Company B.

Example 2: Company Z bought Company Y. Only Company Z remains. Company Z is responsible for Company Y’s pension plan.

There is an exception when a company is in bankruptcy. If Company Y is in bankruptcy when Company Z wants to buy it, then Company Z may decide not to take on Company Y’s pension responsibility. If a company goes bankrupt, the pension responsibility will move to the Pension Benefit Guaranty Corporation (PBGC).

The PBGC acts as an insurance company for pension plans. If an employer cannot pay its pension responsibilities, the PBGC will take over the pension for the employer and pay the pension money to the employees. The PBGC insures most defined benefit pension plans.

Are you having trouble finding your former employer? Is your pension lost? Were you told that you don’t have a pension, but you think you do? Here are ways to get help:

• Pension Benefit Guaranty Corporation: The PBGC keeps a record of all insured plans and plans that it has taken over on the PBGC website.
• Pension Action Center: The Pension Action Center is a free service that helps you find a lost pension. The center also assists in situations where the employer denies your pension. To get help:
  • Fill out the online request form
  • Call toll-free at 1-888-425-6067
• National Pension Lawyers Network/Pension Rights Center: The National Pension Lawyers Network helps connect you with pension lawyers in your area who provide legal advice about pension litigation. To get a free referral:
  • Fill out the online request form
  • Call toll-free at 1-888-420-6550

Before calling any of these groups it would be helpful to know the basic terms of your pension, whether your pension is a public or private pension, and whether it is a single-employer or multi-employer pension.