What Happens To Your Pension When You Leave A Company?

When you leave a company, it’s important to understand what happens to your pension plan. Whether you’re retiring or moving on to a new job, your pension is a valuable asset that you’ve earned over the years. In this article, we’ll explore what happens to your pension when you leave a company and provide actionable advice to help you make informed decisions about your retirement savings.

Understanding Pension Plans

Before we dive into what happens to your pension when you leave a company, it’s important to understand what a pension plan is and how it works. A pension plan is a retirement savings plan that is typically offered by employers to their employees. The plan is designed to provide a steady stream of income during retirement, usually in the form of monthly payments or a lump sum payout.

Types of Pension Plans

There are two main types of pension plans: defined benefit plans and defined contribution plans.

• Defined Benefit Plans: These plans provide a guaranteed retirement income based on a formula that takes into account your salary and years of service with the company. The employer is responsible for funding the plan and assuming the investment risk.
• Defined Contribution Plans: These plans allow employees to contribute a portion of their salary to a retirement savings account, such as a 401(k) or IRA. The employer may also make contributions to the account, and the employee is responsible for managing the investments and assuming the investment risk.

What Happens to Your Pension When You Leave a Company?

Defined Benefit Plans

If you have a defined benefit plan and you leave your company, you have several options:

• Leave the money in the plan: Depending on your plan’s rules, you may be able to leave your pension with your former employer. This may be a good option if you’re close to retirement age and you’re satisfied with the plan’s investment performance and benefits.
• Roll over the money: You can roll over the money from your pension plan into an IRA or another qualified retirement plan. This can give you more control over your investments and allow you to avoid taxes and penalties.
• Take a lump sum distribution: You may be able to take a lump sum distribution of your pension benefits. However, this may not be the best option for everyone, as it can result in a large tax bill and may not provide as much income in retirement as a monthly pension payment.

Defined Contribution Plans

If you have a defined contribution plan, such as a 401(k), and you leave your company, you have several options:

• Leave the money in the plan: Depending on your plan’s rules, you may be able to leave your 401(k) with your former employer. This may be a good option if you’re satisfied with the plan’s investment performance and fees.
• Roll over the money: You can roll over the money from your 401(k) into an IRA or another qualified retirement plan. This can give you more control over your investments and allow you to avoid taxes and penalties.
• Take a lump sum distribution: You may be able to take a lump sum distribution of your 401(k) benefits. However, this may not be the best option for everyone, as it can result in a large tax bill and may not provide as much income in retirement as a monthly pension payment.
• Convert the money to an annuity: You can use the money in your 401(k) to purchase an annuity, which can provide a steady stream of income during retirement. However, annuities can be complex and may come with high fees, so it’s important to do your research and choose the right annuity for your needs.

What to Consider When Making a Decision

When deciding what to do with your pension plan, it’s important to consider several factors:

• Your age: If you’re close to retirement age, you may want to consider leaving your pension with your former employer or taking a monthly pension payment to ensure a steady stream of income during retirement.
• Your investment goals: If you’re comfortable managing your own investments, rolling over your pension into an IRA or another retirement plan may be a good option. This can give you more control over your investments and potentially higher returns.
• Your tax situation: Taking a lump sum distribution of your pension benefits can result in a large tax bill, so it’s important to consider the tax implications of each option.
• Your retirement income needs: You’ll need to consider how much income you’ll need during retirement and which option will provide the most income.

FAQs

What is a vesting period?

A vesting period is the amount of time you need to work for an employer before you’re entitled to their pension plan benefits. For example, if your employer has a five-year vesting period, you’ll need to work for the company for at least five years before you’re entitled to their pension plan benefits.

Can I take my pension with me when I change jobs?

It depends on your pension plan’s rules. If you have a defined contribution plan, such as a 401(k), you can typically roll over the money into an IRA or another qualified retirement plan. If you have a defined benefit plan, you may be able to leave the money in the plan or take a lump sum distribution.

What happens if my former employer goes bankrupt?

If your former employer goes bankrupt, your pension plan may be at risk. However, there are federal protections in place to ensure that your pension benefits are safe. The Pension Benefit Guaranty Corporation (PBGC) is a federal agency that provides insurance for certain pension plans. If your plan is covered by the PBGC and your former employer goes bankrupt, the PBGC will step in and pay your benefits to the extent allowed by law.

Can I contribute to a pension plan on my own?

No, pension plans are typically offered by employers to their employees. However, you can contribute to an individual retirement account (IRA) or a 401(k) plan if you’re self-employed.

Conclusion

When you leave a company, it’s important to understand what happens to your pension plan and make informed decisions about your retirement savings. Whether you have a defined benefit plan or a defined contribution plan, you have several options for what to do with your pension when you leave your company. Consider your age, investment goals, tax situation, and retirement income needs when making a decision. And remember, there are federal protections in place to ensure that your pension benefits are safe.