Pension Pop-Up Option

Company and union pensions under defined benefit plans are undoubtedly an invaluable tool for retirement. But, like everything else in planning for retirement, the strength of them will ultimately come down to how you position them. When retirement comes and you want to choose how to withdraw your money from your annuity, the options offered to you are what are referred to as “pop-up” options. How you utilize your pop-up option needs to be considered in lieu of how you can leverage your pop-up option.

Defined Benefit

A defined-benefit plan is an employer-sponsored retirement plan where employee benefits are computed using a formula that considers several factors, such as length of employment and salary history. It offers an employer/sponsor pension with a lump-sum and/or other options available. The financial vehicles employers and unions are offering these options through are annuities. Number 1 below is the pension pop-up option offered in a joint or survivorship annuity. Numbers 2 and 3 are other options that companies offer for pensions in defined benefit plans.  

Protecting Standard of Living

1. A joint-and-survivor annuity pays you during your lifetime and when you die continues to pay your spouse or other named beneficiary. Your company or union may afford you the option of choosing either a 100, 75, or 50 percent joint-and-survivor annuity. A 50 percent annuity pays the most up front – but - provides your beneficiary with half of your benefit amount when you die. A 75 percent annuity gives you less than the full amount up front while you are living – but - gives your survivor three-quarters of your old benefit when you die. The 100 percent option gives you less than the previous 2 up front – but – gives your survivor 100 percent of your full payout benefit after you die.

2. A single-life annuity provides the largest monthly payment but pays only during your lifetime. If your spouse will need money, it is not a smart option to choose.

3. There are unions which allow to you take your pension up front in one lump sum. Without health risks or being miles above and beyond where you need to be financially with a safety net, this is not a recommended option.

Most unions offer both defined benefit and a 401(k). However, whether you have both or just a pension, most people think they will only have to base their decision of which option is right for them on only a few things: Health, retirement plans (travel, selling house etc.), how much money they have saved, how much money they will need to leave for their spouse. But these are not the only things that should be taken into consideration.

Sliding Under the Provisional Income Radar

Let’s look at Provisional Income. When you are done earning income and enter into your retirement years, the IRS deems money that you are living off in retirement to be provisional income. It can be anything from a 401(k) to dividends, investments, CD account or even bonds. Whereas the IRS may not be able to tax your pension up front, they can still find a way to tax you. Provisional income counts towards an IRS threshold above which social security benefits become taxable. This is where I lose most people. They simply cannot accept that the government can tax your social security benefits. They can. Look up in Internal Revenue Code 86. This is their formula: they take half of your social security benefits, your gross income - including your 401(k) and pension, and your tax exemptions and pool them together. If the sum of these number exceeds given thresholds, they will retroactively tax 50% your social security income or 85% of it according to whatever bracket they choose. Consider this: IF you are withdrawing from both a 401(k) and defined benefit plan your provisional income will be higher and will trigger taxes on your social security benefits. You are going to want to slide under this threshold by making every dollar surrounding your pension non-taxable. Which leads us to the good news: this tax is avoidable.

Limitations with Defined-Benefit Plans

Aside from Health, retirement plans (travel, selling house etc.), how much money you have saved, and your legacy; you need to ask questions on how to leverage your dollar. Here are just some of the things that you should consider while negotiating which pop-up option is right for you:

• Your options are limited

• They do not offer a lump sum in the case of an emergency

• There can be market-risk if you have your money in a variable annuity. These are not commonly used for pensions, but you should still check to see what your company is utilizing.

• Your gains are taxed according to the exclusionary ratio

• If your pension is the primary source of your income and is not big, inflation will be an even greater deterrent to your standard of living than it is already. Your spouse may be left with less of a payout that has less buying power due to inflation.

• Pensions trigger taxes to your Social Security income if you have a 401(k) as well as a pension.

• If you choose the pop-up option where you get more money up front due to health issues, your beneficiary will have to contend with compounding health issues with half the original benefit after you die.

• If you have a single-life annuity and you die your spouse receives nothing afterwards. You will have to set up a separate account for that. 

As stated earlier, if you are withdrawing from both a 401(k) and defined benefit plan your provisional income will be higher and will trigger taxes on your social security benefits. And even if you are just drawing from a defined benefit plan you are still not able to truly leverage your dollar given the limitations of an annuity.

Social Security is projected to be broke by 2035. When Social Security began there were 42 workers for every 1 person retiring. Now there are just 3 workers for every 1 retiring. And this is the system that you have been paying into all your working years! And if we consider that there have been 3 major down-market distributions in the last 20 years – each averaging about 50%; so, if you're pension is tied to the market, then your retirement may not be as carefree as you had hoped for.


You can keep your pension and protect your spouse after you die. You can leverage that dollar that you have by protecting your savings – 401(k), investments, pension – from taxes thereby sliding under the provisional income bracket and keeping more of your social security benefits, pension and 401(k) money (that will be taxed more and more every time you withdraw from it). These are the dollars that otherwise be utilized to cover the difference. Avoid this unnecessary taxation to your Social Security. Simply with positioning, you can:

• Have no limitations to options of accessibility

• Have a lump sum of money in case of an emergency without having to utilize your pension

• Money that is neither taxable as ordinary income or provisional income

• Not subject to market-risk

• Will not trigger a tax on your social security income

• Will leave a tax-free account for your spouse upon your death

• Can be used to pay out according to a strategy tailor designed just for you

….and many more.

This is the type of freedom that you had in mind when you were saving for retirement. And it is all just a matter of how you position your assets.

Be sure to pick up your free Report: Proven Strategies to Avoid Retirement Catastrophe! It’s FREE! Then feel free to click the GET STARTED button, fill out a brief

questionnaire, so that you can be contacted for a FREE consultation.