Is my pension taxable?
Pension payments are generally taxable as ordinary income, except for any part that returns money you already paid tax on. IRS Topic 410 explains the basics.
Social Security and pensions
How Does a Pension Fit Into Retirement Income?
A traditional pension, also called a defined benefit plan, pays a set monthly amount in retirement, usually for life. Along with Social Security, it can cover a large share of essential bills. Key choices include taking monthly payments or a lump sum, and whether payments continue for a surviving spouse. Many private pensions do not rise with inflation, so their buying power can shrink over time.
Written and reviewed by Dan Hopwood, Retirement Income Specialist · Retirement Income Knowledge Center
Monthly payments or a lump sum
Some plans let you take your pension as a single lump sum instead of monthly payments. Monthly payments give lifetime income without investment decisions. A lump sum gives control and flexibility but puts the job of making it last on you. The choice is usually permanent.
Survivor options
Married retirees usually choose between a single-life payment and a joint and survivor payment. The single-life option pays more but stops at death. A joint and survivor option pays less but continues, fully or in part, to the surviving spouse. Federal law generally requires a spouse's written consent to give up survivor protection in many private plans.
Illustrative pension choices
- Single life
- $2,000 / month, stops at death
- Joint and 50% survivor
- $1,850 / month; spouse keeps $925
- Joint and 100% survivor
- $1,700 / month; spouse keeps $1,700
Illustration only. Your plan's actual amounts and options will differ.
Pension protection
Many private-sector pensions are insured by the Pension Benefit Guaranty Corporation (PBGC), a federal agency, up to limits set by law. Government pensions are not covered by PBGC and follow their own rules.
Fitting it into the plan
Add your expected pension to your Social Security estimate and compare the total with your essential spending. Remember that pension payments are usually taxable income and may not rise with prices.
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Common questions
Does my pension affect my Social Security?
Usually not for private pensions. Rules for some government pensions changed under recent law, so check with the Social Security Administration if you have a government pension.
What if my employer's pension plan fails?
For many private plans, PBGC steps in and pays benefits up to legal limits. Check PBGC's website to see whether your plan is covered.
Should I take my pension as a lump sum or monthly payments?
Monthly payments provide steady income for life, often with a survivor option, while a lump sum gives control and flexibility but puts the job of making money last on you. The right answer depends on your health, other income, spouse's needs and the plan's terms. Compare both in writing before the deadline.
What survivor option should I choose on my pension?
Survivor options pay a reduced check while you are alive in exchange for continued payments to your spouse after you die. Choosing a single-life option pays more now but may leave a surviving spouse with less. Many plans require spousal consent to waive survivor benefits.
Can I change my pension survivor option after I retire?
Usually not. Most pension survivor elections become permanent once payments start, though some plans have limited exceptions. Review the choice carefully with your plan administrator before the deadline.
Does my pension adjust for inflation?
Some do and many do not. Many private-sector pensions pay a fixed amount, while some government pensions include cost-of-living increases. Your plan documents state whether and how payments rise.
How do I combine a pension with Social Security and savings?
Start by adding the pension and Social Security together to see how much of your spending they cover. Savings then only need to fill the remaining gap. Timing each source well can reduce withdrawal pressure.
What happens to my pension if I retire early?
Many pensions reduce the monthly amount if you start before the plan's normal retirement age. The reduction is often permanent. Your plan's benefit statement shows the amount at different start ages.
Authoritative sources
This page is educational and general in nature. RetirementLeverage™ and Retirement Planning Store, Inc. do not provide individualized investment, securities, tax, or legal advice; please consult a qualified tax professional or attorney about your own situation. Insurance products and services may not be available in every state, and any guarantees are subject to the financial strength and claims-paying ability of the issuing insurance company.