How do Pensions Work?

[vhoffman]

I guess the obvious place to get answers to my questions is HR, but I just don't want to approach them right now.

My dh works for a large company and does have a defined benefit pension plan. He has worked more than 5 years there (just barely), so he should be vested. He's 53. Rumor has it a lay off is pending (aren't there always rumors to that effect at any company ). Well, the rumors are particularly worisome right now. I just don't want to ask HR anything right now and flag us! If he were laid off, would he qualify for a pension? Does he have to be a certain age before collecting? At his age his chances for another equivilant job are slim at best. He'd be competing against people half his age. Also, he's at the top of his pay scale, which, of course, makes him ripe for picking. If laid off, could we claim early retirement? We also have a 401k rollover, and some other funds, we won't be high and dry!

 

[barkley]

with my pension you had to be both vested and a minimum age to collect or qualify unless you became disabled (based on their criteria not what you or nesc. your doctor beleives) and then you still had to be vested but there was no age requirement. once you were vested you could leave employment and once you hit the minimum age, even if you were going to stay fully employed at another job you could collect.

there were a few rare occasions when my employer faced with lay-offs would offer a 'golden handshake' and temp. lower the age a couple of years (or add service years to increase the pension pay) to those near retirement age to reduce the active employee roles.

i think you realy have to look at what the fixed benefit is based on-i've got some fellow retirees who thought they would be getting alot more than they got. the did'nt realise that their employers did'nt base the rate on anything other than their base pay (so nothing for management differentials, overtime, productivity bonuses)-and some found that the 'fixed' was based on ensuring that the benefit coupled with other benefits the employer assumed the employee would qualify for were received (so the employer set the retirement age at the minimum the person could qualify at social security for and the pension was the difference between that and a percentage of their final pay) so instead of getting x dollars PLUS their social security they got a much lower amount.

 

[CharmedLife]

I'm certainly no retirement expert (have about 30 years to go), but I believe you cannot dip into your 401k until age 59 1/2 without major penalty. So you should probably not count on being able to get at that money for a few years unless you have no other choice.

I would suggest maybe you should talk to a banker or investment professional who probably knows more about pensions in general.

 

[lkjasd]

(All companies are different so take this advice at your own risk)

In general, big companies (okay, the one I worked for) and the governemnt have a pension that pays you 1% multiplied by your average base salary over the previous three years multiplied again by the number of years you worked there. As was stated by another poster, this does not include OT, etc. and may be differnet for management level employees. For example, if your DH makes $100,000 and worked there five years, he would get $5000 per year AT RETIREMENT AGE. He would have to wait until whatever age the company has set for retirment benefits before getting this money. There are many caveats that can adjust the percentage and age to this but that is the general picture.

Also, as stated, all other retirement funds that are tx free from the government will incur a 10% penalty, PLUS TAXES, if withdrawn prior to age 59 1/2.

Good luck.

 

[KingTryton]

Not sure I can help with the specifics of your question but most pensions work off of an annuity contract. The employer funds the annuity based on the employees base wages and factor in length of service as well as assumed retirement age. Leaving early or starting payments prior to retirement age will reduce the monthly payments.
The best advice would be to contact HR for more information but I understand the reluctance there. As far as the 401k it would be best to leave it intact due to the large penalties. You may want to consider moving this 401k to an outside company especially if it is tied to company stocks or funds. A company that is down sizing could be a high risk for losing assets.

 

[GatorGal]

I was in public accounting for 15 years and from my experience (and memory) here's how it works:

If you husband is fully vested when he's laid off, he can do one of two things, 1) take his money out or 2) leave it be within the current fund.

If he takes it out, he has 2 options; 1) roll it over into an IRA. If he chooses this option, his best bet is to have the current company cut the check to the investment firm he's got the IRA in. If they make the check payable to your DH they are required to withhold income taxes of at least 20% and if he were to decide to roll it over, you'd have to kick in whatever was withheld in order to avoid any tax liability. Second option is to take the money. You have to pay income taxes on the funds as well as a 10% penalty. As I said earlier, if the check is written out to him he'll withhold some but probably not all the taxes due on the total. Either way, he'll receive a 1099-R at the end of the year, showing taxable the appropriate taxable amount (zero if it's rolled over)

If he decides to leave the funds alone, he will not receive any more contributions to the fund from the company, but will continue earn income on the funds based on his percentage of his total share to the entire fund. He could start to collect the annuity when he reaches retirement age as defined by the pension plan, usually around 59 1/2.

If he's not fully vested, any unvested portion will be redistributed to people still within the fund.

However, if the company goes belly up, they liquidate the fund, in which case he'd have the choice to roll the funds over to an IRA or take the funds and pay the taxes as described above.

You should see a tax professional to walk you through all the options. What you end up doing can differ depending on your financial situation at the time of the lay off and his prospect of new employment.

HTH

 

[jeni1072]

I wouldn't count on anything in any case, since my Dad worked for United 30+ years, and had all his pension taken away as part of their bankruptcy plan! I no longer have faith in a whole lot of employers.

 

[vhoffman]

Thanks for the advice...just don't know what to do right now. One thing that comes to mind is to temporarily stop funding the 401k and put that money in a money market, so at least that will be liquid should the need arise. Getting money out of a retirement plan is a hassle! Or at least only fund it up to the company match--might as well take free money. Right now we're putting the full amount allowed--I believe its something like 15% in the fund. We also put aside $2000 per year in a Roth, perhaps stop that just for now and beef up the emergency funds. We can always start funding them again later, when this blows over.

I was hoping that somehow dh could get his pension early if laid off. My understanding of the pension thing is poor at best (I do understand how the 401k works, however, not all the ins and outs of the pension bit). Just how does a person start collecting pension funds? I understand he must have worked at least 5 years, which he has, but he probably needs to meet a certain minimum age. A guy 30 who has worked at a co 5 years certainly wouldn't be collecting a pension from them!

Maybe we should look into accelerated pension benefits, the "golden handshake" someone menitoned. He needs to know what his rights are and what he can negoiate before the fact. If they just call him in and give him a pink slip he needs to know what to say and do before walking out the door. We've been through layoffs before (who hasn't?), but this time its different. At his age I highly doubt he has a real chance in the job market competing with all the 30 something job seekers. At best he could get contract work.

I got a few suggestions from another thread about what to do if you think you might be laid off. A few practical suggestions--shop for an interview suit now, while we can find something on sale, rather than pay top dollar. Also, take out a home equity line of credit now, while we're still credit worthy. All the advice about resumes, contacts, etc., just aren't as helpful for someone his age. I keep hearing about people taking early retirement in their 50's. People his age are looking at getting out of the job market, not back in. Well, take it one step at a time. Oh, also, I read somewhere take advantage of all dental, medical, perscription benefits we can squeeze in now, before we might lose them.

We feel so helpless, our fate is in someone else's hands and all we can do is wait. Meanwhile our day-to-day life goes on, somehow he's expected to keep going to work and be productive with this hanging over him. Well, we just have to hang in there! Thanks for all the advice, any more suggestions appreciated!

 

[momofthreegamers]

Being a Human Resources professional, I am ashamed that you do not feel comfortable in asking your HR department questions. I would hate to think that any of our employees did not feel comfortable asking me questions for fear of being flagged. But that's just me, I guess. Back to the topic...our pension plan: starting at age 55 you are eligible for an early retirement allowance, which is subject to a reduction factor based on age. The bottom line, every defined benefit plan is different...you really should talk to HR or your Third Party Administrator. If one of our employees spoke to our TPA regarding their pension, we wouldn't know about it, which may or may not be the case at your husband's company. Good luck!

 

[vhoffman]

Momof three....

Get real! I shouldn't feel "ashamed' for not wanting to ask HR what HR might do to us if we get laid off! You're not "there to help us" you're there to get the most work for the least compensation! I ceretainly can't be expected to go running to HR at a time like this!

What I'm trying to determine is what options we have financially if dh is laid off. He is vested in his co pension, I just don't know if that would do us any good at this point if he is laid off. Meanwhile we just wait. We've always lived below our means so I guess we're better prepared than some. We do have savings, low debt, etc. Well, I guess the threat of layoffs is always there for anyone, we can't live our lives in fear of the pink slip. However, we do need to have a back-up plan. DH is already looking into consulting work, teaching, etc. It might be good to launch those as an aside, anyways, to have something in case his main job goes. Always best to have a back-up plan.

 

[momofthreegamers]

All I meant was I would personally feel horrible if one of our employees felt like they could not ask me a question about anything. I truly believe that my position a "service" position. Part of my job is to make sure that employees understand their benefits; medical, dental, EAP or pension, it's all the same. We are currently in the middle of a "pension freeze announcement". My job for the next several weeks is expaining to our employees all of the changes that were just made to their pension. My pension just went bye-bye..now frozen in a sea of defined benefit jello.

Being laid-off (or fear of being laid-off) is never an easy matter to deal with. 5 years ago, the company I worked for had a large lay-off that I was caught up in. That company has since gone from 750 employees to 275 employees. That was a very difficult time for my family...constantly worrying about if today was the day...I was 34 weeks pregnant the day I was laid off. It sounds to me as though you guys are in much better shape financially than we were. We were not prepared at all. We nearly lost our house. But everything worked out and now I work for an amazing company.

I hope everything works out for you and your husband.

 

[barkley]

another issue to look at is what beyond a pension a retirement package will provide a person. as an example-the place i retired out of (which was a government agency) provides as part of all retirement packages the ability to get full medical, dental and mental health insurance at the same rate as an active employee pays (although the rate drops significantly when the retiree becomes medicare eligible such that the private insurance becomes the secondary plan for them)-and this is available to them, their spouse, any dependant child under age 25. they have a one time choice to opt to have this coverage.

so a person who had worked for my previous employer for 5 years could have left via resignation or lay-off, left their contributions in the system, gone on to whatever career choices they desired-and at the minimum retirment age, contacted the retirement board to start collecting a small pension-but gotten the full med benefits. there were many employees who went this route-they get yearly retirement statements that show what their anticipated pension will be, how much interest has accrued on their contributions, and detailing what what other benefits they will be eligible to by virtue of converting from 'former employee' to 'retiree' status.

i can understand the op's reluctance to ask hr much at this point-in some companies/agencies a single h/r person can wear many hats, administer many programs-and although some may come with specific confidentiality, shared access limitations, the administrator may not appropriatly compartmentalize their functions. i was in a managment classification at my former employer and worked directly with hr staff a good deal, and often suspected that information provided them was via certain means was perhaps being used inappropriatly for other means. i had no idea if my suspicions were true until i had the misfortune to become ill and had to apply for a myrid of beneifts i was entitled to-and upon reviewing eligibility documentation pertaining to one issue (as part of a mandatory legal review) learned that the hr person had made decisions to inappropriatly delay/reduce a benefit because in their function administering another program they had knowledge of financial matters that legaly were restricted to that program and should have never been a factor of consideration. in hindsight i now realize that i should have known better when i had instances to call hr on an employees behalf and was told not to worry about the progress of an application for benefits in one area that the employee was already getting similar benefits from another (both were separate, neither cancelled the other out-and receipt of one did'nt justify delaying determination of the other).

to the op-does you husband get any type of yearly benefit statement (mine sent one out to active employees)-it should detail what formula is used and what the criteria for retirement is. he might also have something in the inital hiring paperwork he received (or if he is in a union represented job they can provide information).

 

[debster812]

Momof three....

Get real! I shouldn't feel "ashamed' for not wanting to ask HR what HR might do to us if we get laid off! You're not "there to help us" you're there to get the most work for the least compensation! I ceretainly can't be expected to go running to HR at a time like this!

YOU get real. She said she was ashamed, she never said YOU were ashamed. Geez. You're very quick to jump all over people who are trying to offer advice that YOU asked for.

Being a Human Resources professional, I am ashamed that you do not feel comfortable in asking your HR department questions. I would hate to think that any of our employees did not feel comfortable asking me questions for fear of being flagged. But that's just me, I guess. Back to the topic...our pension plan: starting at age 55 you are eligible for an early retirement allowance, which is subject to a reduction factor based on age. The bottom line, every defined benefit plan is different...you really should talk to HR or your Third Party Administrator. If one of our employees spoke to our TPA regarding their pension, we wouldn't know about it, which may or may not be the case at your husband's company. Good luck

IMHO every company, and every pension plan is different, and the only way you're going to get concrete answers is to either read the paperwork of your DH's plan very very closely, have DH talk to other associates (which may or may not be helpful) or bite the bullet and have DH talk to his HR dept.

 

[Lisa_Belle]

I guess the obvious place to get answers to my questions is HR, but I just don't want to approach them right now.

My dh works for a large company and does have a defined benefit pension plan. He has worked more than 5 years there (just barely), so he should be vested. He's 53. Rumor has it a lay off is pending (aren't there always rumors to that effect at any company ). Well, the rumors are particularly worisome right now. I just don't want to ask HR anything right now and flag us! If he were laid off, would he qualify for a pension? Does he have to be a certain age before collecting? At his age his chances for another equivilant job are slim at best. He'd be competing against people half his age. Also, he's at the top of his pay scale, which, of course, makes him ripe for picking. If laid off, could we claim early retirement? We also have a 401k rollover, and some other funds, we won't be high and dry!

Unfortunately, there is no cut-and-dry across the board answer for you. Each company's policies are different. However, I can say that if there are layoff rumors floating about, your DH would be wise to start looking for another job. If he does get caught in a layoff though, the company will most likely offer a compensation package that may or may not include early retirement and may or may not include severance pay and/or benefits. He will probably be able to continue health benefits for a certain amount of time, although he may be responsible for the entire premium rather than a portion. He will also be elgibile to receive unemployment benefits once any severance pay is exhausted. As others have said, I would avoid touching the pension until it is an absolute emergency. Even though he's not fresh out of college, I've known several 50-somethings (and even some 60-somethings) who have found great success in finding jobs - and a few who have found new careers.