Whether you’re changing jobs or retiring, knowing what to do with your hard-earned retirement savings can be difficult. An employer-sponsored plan, such as a Pension & 401(k), may make up the majority of your retirement savings, but how much do you really know about that plan and how it works? There are seemingly endless rules that vary from one retirement plan to the next, early out offers, interest rate impacts, age penalties, and complex tax impacts.
“Workers are far more likely to rely on their workplace defined contribution (DC) retirement plans as a source of income. 8 in 10 believe this will be a major or minor source of income in retirement. 3 in 4 expect income to come from their personal retirement savings or investments.” -Employee Benefit Research Institute
As of March 2019, 71% of full-time private-sector American workers had access to an employer retirement plan, but only 56% chose to participate. Regardless of what you choose to do with the funds from your employer retirement plan, you’re already ahead of 44% of all workers.
United Airlines Retirement Plans
Whether you work for United or joined the company through the acquisition of Continental each company has a unique plan. These plans are often complex so it is important to work with an advisor who understands your plan. Your company plan is complicated and difficult to understand, especially because of many pension benefits being frozen. To better understand your plan let’s look at the different pension plans that you may have accrued benefits for while working for United.
- United A Plan – Defined Benefit Pension Plan
- United terminated their Defined Benefit Pension Plan on December 30, 2004.
- The remaining benefits have been assumed by the Pension Benefit Guaranty Corporation, or PBGC.
- PBGC will distribute the benefits to employees who were participating in the plan before December 30, 2004.
- You cannot receive your benefit from the PBGC in the form of a lump sum. The only options available are:
- A single life annuity that provides fixed monthly payments until the employee’s death
- A 5 year, 10 year, or 15 year certain-and-continuous annuity that provides fixed monthly benefits for a designated period of time. If the employee dies before the period ends, the designated beneficiary will receive the remaining payments.
- A 50%, 75%, or 100% joint-and-survivor annuity which provides fixed monthly benefits for the employee’s lifetime, then pays a certain % of the benefit to a spouse or other beneficiary after the employee’s death.
- A joint-and-50% survivor “pop-up” annuity that is the same as the joint-and survivor annuity above except that if the employee’s spouse or beneficiary dies before the employee, the employee’s monthly benefit will “pop-up” to the single life annuity amount.
- Continental Pilots Retirement Plan (CPRP) – A Plan
- This Defined Benefit Pension Plan (formerly CARP) was frozen in 2005 and only remains for Pilots under the CPRP.
- The retirement benefit is formula driven based on final average earnings (FAE)and years of service.
- It is calculated to be paid over your lifetime.
- You will want to understand your early and normal retirement eligibility and vesting service before making your election for retirement. Another important decision will be the payment option you choose when you retire:
- Lump-sum payout
- A single-life annuity that provides fixed monthly payments until the employee’s death
- A joint-and-50% survivor “pop-up” annuity that is the same as the joint-and-survivor annuity above except that if the employee’s spouse or beneficiary dies before the employee, the employee’s monthly benefit will “pop-up” to the single life annuity amount.
The lump-sum option is effectively the present value of your single lifetime annuity paid in one single sum. The calculated amount will be affected by mortality rate assumptions and current interest rates. For example, a higher interest rate environment will provide a lower lump‐sum amount.
- Understanding interest rates is key to understanding when the right time to take their pension as a lump sum.
- Segmented rates are updated every six months, using interest rates from August and February to establish its interest rate used in the calculation for the following half-year.
- The following rates are what will be used to calculate your Lump Sum for 2020 based on the:
- Benefits Commencement from:
- January – June: 2.09 / 3.00 / 3.61
- July – December: 1.73 / 2.72 / 3.35
- Benefits Commencement from:
- The first segment rate is used to determine the present-day value of the stream of monthly payments that would be made during the next five (5) years; the second rate is used to determine the present-day value of the stream of monthly payments that would be made from 5 – 20 years; the third rate is used to determine the present-day value of the stream of monthly payments that would be made more than twenty (20) years into the future. Your lump sum is the sum of these three values.
- As you have read above, a lower interest rate generally means a larger lump sum value which is fantastic news for employees looking to begin their benefit in the second half of this year.
If a Pension is offered, your company’s retirement plan will generally allow for different forms of payment.
Single Life Annuity
- The monthly Single Life Annuity is the benefit from which all of the optional forms of payment under the plan are derived
- Pays a fixed amount each month for retiree’s lifetime
- A death benefit may be payable to your beneficiary
- A death benefit is payable if vested and employee dies before employment ends or start of receiving benefits
Lump-Sum Option (Most Airline Companies Offer a Lump Sum)
- Lump-sum payment is actuarially equivalent to the total annuity you would have received as a Single Life Annuity during your lifetime
- Calculated using actuarial factors based on your age and the interest rate in effect on your annuity starting date
- No death benefits are payable
NOTE: Lump-Sum vs. Annuity – With decreasing interest rates, your lump-sum payout will increase.
Life & Term-Certain Annuity Option
- Smaller than the Single Life Annuity
- 5, 10, or 15 year period certain
- If you have multiple beneficiaries or if your beneficiary is your estate or trust, remaining payments converted actuarially to a lump-sum
- No death benefits are payable
Joint & Survivor Annuity
- Upon your death, a percentage of your monthly benefit is paid to your joint annuitant for his or her lifetime
- Reduction factors may apply depending on your company’s policy
- Receive same level of income before and after receiving Social Security benefits
- The level of income may change at a certain age. For example in the Chevron Uniform Income policy:
- Before age 62, employees receive a larger monthly annuity from the plan
- After age 62, when Social Security benefit is available, employees receive a smaller monthly annuity from the plan
- Each company has varying rules in regards to Uniform Income, review your company’s SPD or talk to an advisor to find out the rules for your specific plan.
If you are looking for more details about your benefits, reach us at TechStaffer.
- “Retirement Plans-Benefits & Savings.” U.S. Department of Labor, 2019, www.dol.gov/general/topic/retirement.
- “Generating Income That Will Last throughout Retirement.” Fidelity, 22 Jan. 2019, www.fidelity.com/viewpoints/retirement/income-that-can-last-lifetime.
- UAL Summary Plan Description, 2017