Are you a member of a Defined Benefit Pension Plan? If so, you may want to inquire about a Pension Maximization Strategy and get the most out of your retirement.
There are two options in regards to receiving a pension benefit upon retirement: joint-life or single-life. The single-life option provides the pensioner with a larger monthly benefit than the joint-life option. However, as the name suggests with the single-life option, the pension benefit ends when the pensioner passes away.
The Pension Maximization Strategy provides the best of both worlds to the pensioner and their spouse. The pensioner can extract the maximum monthly benefit possible from the pension, as well as providing financial support for the spouse. Whether you are near retirement or have just started your career, this could be a great fit.
How is a Pension Maximization Strategy accomplished?
Step 1: The pensioner applies for a permanent life insurance policy on their life. Upon the pensioners’ death, a tax-free death benefit is paid to their spouse. The spouse can now use the life insurance proceeds to replace part or all of the income they would have received if they had the joint-life pension.
Step 2: On retirement, the pensioner selects the single-life pension option (requires spousal consent).
Possible Outcomes
| What Happens… | Joint-Life Pension Option | Pension Maximization Strategy (Single-Life Option) |
| While both spouses are alive | Reduced pension benefit is received | Maximum pension benefit is received |
| If the pensioner dies first | Spouse continues to receive the reduced pension benefit | Spouse receives tax-free death benefit from the life insurance policy to provide retirement income |
| If the spouse dies first | Pensioner continues to receive the reduced pension benefit for their lifetime | Pensioner continues to receive the maximum pension benefit, and can keep the life insurance policy for other loved ones/legacy, or access the policy cash values for personal use |
| Future Heirs | Receive nothing from the pension plan after the spouse dies | Can receive funds from the life insurance policy |
Each scenario requires a thorough review with a licensed and experienced insurance advisor or Certified Financial Planner. Above all, we want to ensure the Pension Maximization Strategy is right for you and your family.
For more information on the Pension Maximization Strategy or to find out if it’s a viable option for you, contact Jeff Graham at (604) 363-7549 or jeff@firstoakfinancial.ca.
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DISCLAIMER: this commentary is provided for general informational purposes only and does not constitute financial, insurance, investment, tax, legal or accounting advice.