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Your spouse and pre-retirement survivor benefits

July 25, 2013

This is part 1 of a three-part series (read parts 2 and 3) exploring scenarios based on the types of circumstances we see with pre-retirement survivor benefit recipients.

Tim, 42-years old, had been teaching for 18 years. On his way to school, a driver ran a red light and hit him head-on. He did not survive the crash.

His wife Amanda, a full-time law clerk, is now faced with raising their family on her own. She has a long list of to-dos, and begins to work her way through them. Among the items is to call Tim's pension plan to tell OTPP that he has passed away.

When Amanda calls, she's greeted by a compassionate Pension Benefits Specialist (PBS). Amanda still struggles with holding herself together, and the PBS patiently walks her through the options available to her. Because she was married to Tim, she automatically is entitled to survivor benefits from his pension.

The PBS explains that Amanda has two options: take a lump sum payment of the commuted value of Tim's pension or collect a survivor pension, based on the commuted value, for the rest of her life.  

His pre-tax survivor benefit is worth about $300,000. If Amanda chooses the lump sum as a cash payment, roughly 30% will be deducted at source for taxes. A lifetime survivor pension would offer Amanda $11,000 a year if she takes it immediately. If she defers it until age 55, it increases to $18,000 a year, and $29,000 a year when she turns 65.

If Amanda opts for the lump sum payment, she can transfer it into her RRSPs, regardless of how much contribution room she has available. Or, she can take the lump sum in cash, but will have to pay any applicable taxes on it. If she opts for the survivor pension, she will receive a monthly pension immediately, and for the rest of her life. She can also defer the pension until she is older.

Amanda feels overwhelmed. With everything she has had to process, making a decision that will affect her and her family for years to come seems like an impossible task.

The PBS stresses that Amanda should meet with a qualified financial advisor before making the decision. There are many factors for her to consider, including her complete financial picture and her health: if she is ill and has a shortened life-expectancy, perhaps a lump sum may be the best option. On the other hand, if she's in good health, and has two young children, the pension may suit her needs and help her to manage her day-to-day costs over the years. If anything should happen to her while her children are still dependent, the pension could be passed onto them. The PBS prepares a set of documents with the calculations for each option and mails them to Amanda so she can take them to her financial planner.

Finally, the PBS emphasizes that Amanda does not need to make this decision right away. She has up to one year from the time of Tim's death to decide. If she does not make a decision in that timeframe, she'll receive the survivor pension for life.

Amanda hangs up the phone. Once the documents with the critical calculations arrive in her mailbox, she'll present them to her financial advisor who will help her to put her survivor benefit into context with her entire financial situation.