Planit:How Do I Enter in Pensions?

From Planipedia

Contents 1 Defined Benefit Pension Plan Benefits on Retirement, Death and Disability 2 Retirement Benefits 3 Death and Disability Benefits from Defined Pension Plans 4 Conclusion

Defined Benefit Pension Plan Benefits on Retirement, Death and Disability

When a client is a member of a defined benefit pension plan, you will need to identify the benefits that the client is expecting to receive at time of retirement. Identifying an accurate estimate of benefits is probably one of the most challenging aspects of doing retirement planning for any client. This is true regardless of the software you use. It’s truly a challenge in all cases. The purpose of this FAQ is to help users understand the approach used in PlanPlus Planit so you can enter reasonable estimates.

Retirement Benefits

The first job is to identify the benefits that are expected on the clients target retirement age. To do this, you’ll need some basic information and need to do some calculations. Here’s an example:

The above example shows how to calculate the pension benefits for a defined benefit pension plan. There are a number of variations on these pension plans, but most will fit into this structure. PlanPlus makes available a spreadsheet tool to do these calculations. This tool also allows you to do the calculations on multiple formula defined pension plans where the formula is perhaps 2% to a specified salary level reducing to 1.5% for income above that level.

Let’s now look at how you would enter the data from the above example into the Pensions and Other Revenues screen of the PlanPlus Planit. Basically there are two records you have to add to incorporate in both the lifetime pension and the pension bridge.

Here’s an illustration of the detailed entry fields when you add these two records:

Some of the points of interest for Mark’s Lifetime Pension are:

• Mark’s Lifetime Pension starts at his retirement in 2022 and ends at his mortality in 2057.
• Index Rate identifies the indexation on the pension.
• Percent Taxable recognizes that the pension will be fully taxable on receipt.
• Amount on death or Disability will be addressed below.
• Model As: Let’s you identify how this pension should be handled if the auto model process says the client has to work longer. Thus if Mark has to work to age 57, the start date on the modeled scenario will be deferred to 2024.
• Additional Increase is an additional feature that let’s you recognize that if the client works longer he’ll get a larger pension. Note in cases where the full 35 years of service has been reached, this should be set to zero. Or if you merely wish to be conservative in your estimate always leave this set to zero.

Death and Disability Benefits from Defined Pension Plans

If we recognize that identifying benefits from a defined benefit pension plan is challenging, it’s even more so when it comes to identifying benefits that would be payable should your client become disabled or die. Sometimes you can get a number from a pension statement or some insight from a pension booklet what the benefits might be, but more often than not the information in this regard is practically non-existent or very misleading.

One of the key things to remember is that you cannot use a 50 or 60% Survivor benefit, as you might be tempted to do because legislation says that this is the mandatory. This is mistake, which is often made. The problem is that when we are estimating the retirement benefits that will be received, as can be seem from the example above, we do the calculation recognizing the total years of service the client will have by the time they reach their target retirement age. BUT, when we do the needs on death or disability analysis, we are doing the analysis based on the assumption that the client will die or become disabled tomorrow. Thus the additional years of service you have included in the retirement calculation between now and the target retirement age won’t be realized. For this reason you must use caution when entering an assumed percentage of continuation for defined pension benefits on death or disability. From many years of experience, we have identified a “Rule of Thumb” which is basically a conservative assumption that you can elect to use if you cannot find a more ideal answer to the question of benefits on death or disability. Here’s the approach.

Conclusion

Entering information into any financial planning software relative to defined benefit pension plan benefits as mentioned can be one of the more challenging aspects of data collection and interpretation. The various statements and booklets that your client might provide can further complicate it. Unfortunately, many of these benefit statements and booklets do a very poor job of identifying the pension benefit that would be received at your client’s target retirement age. It might identify the accrued pension based on years of service to date, or might project what the benefit might be at normal retirement age . . . typically age 65, but if your client is still accruing years of service and doesn’t want to retire exactly at age 65, rarely do these pension booklets or statements give you what you need to identify a reasonable estimate of benefits expected. That’s why you must be able to do a credible job of identifying benefits that will be received.

One final thing for your consideration is that if you have any concerns that your estimates are questionable, either because of poor information in the pension booklet or any other factor, you might wish to include a statement in the resulting plan that you do the following effect:

• “Note that we have used the information provided to estimate pension benefits expected from you defined benefit pension plan through your employer. However, it’s recommended that you obtain independent verification from you employer to confirm that these estimates are accurate”.

By including such a comment, you could protect yourself from being held accountable for this very important estimate that could impact your advice and recommendations significantly. Because you are at the mercy of the client’s information, this can be a protection. You also may wish to make a habit of having a client authorization signed allowing you to contact their employer directly to get confirmation on your pension estimates.