If I Resign Will I Get My Pension?
Concerned about your pension after resigning? This guide clarifies how your future retirement benefits are impacted and your available choices.
A pension is a retirement benefit provided by an employer, designed to offer financial security during an individual’s post-employment years. It typically involves regular payments made after retirement, often stemming from a fund to which an employer, and sometimes the employee, has contributed. Many individuals wonder about the fate of these benefits if they choose to resign from their position before retirement. Understanding how pensions work, particularly regarding eligibility and access, is important for employees considering a job change.
Understanding Vesting Requirements
Vesting determines when an employee gains a non-forfeitable right to employer contributions in a retirement plan. This concept is foundational to retaining pension benefits upon resignation. Employers use vesting schedules to encourage retention, as benefits are contingent on a certain period of service.
There are two common types of vesting schedules: cliff vesting and graded vesting. With cliff vesting, an employee becomes 100% vested after completing a specific number of years of service, such as three years. Before this period, the employee forfeits unvested employer contributions upon resignation. Graded vesting allows an employee to become partially vested over time, with their vested percentage increasing annually, for example, 20% per year until 100% is reached.
Employee contributions to a pension plan are always 100% vested immediately. However, employer contributions are subject to the plan’s specific vesting schedule. Resigning before satisfying the vesting schedule generally results in losing unvested employer contributions. Employees should review their plan’s vesting rules to understand their entitlements.
How Different Pension Types Affect Resignation
The impact of resignation on pension benefits varies significantly by pension plan type. Understanding whether a plan is Defined Benefit (DB) or Defined Contribution (DC) is crucial for evaluating post-resignation options. These categories structure retirement savings and payouts differently.
Defined Benefit (DB) plans, often called traditional pensions, promise a specific monthly payment at retirement. This payment is calculated based on an employee’s salary and years of service. If vested and resigning, an employee is typically entitled to a future benefit, deferred until the plan’s normal retirement age. This future benefit amount is based on their salary and years of service at resignation.
Defined Contribution (DC) plans, such as 401(k), 403(b), and 457(b) plans, involve employer and often employee contributions into an individual account. The retirement benefit depends on total contributions and investment performance. Upon resignation, once vested, the funds in a DC account belong to the employee. Employees gain control over these vested funds, which they can manage through options like rollovers or withdrawals.
Options for Receiving Your Pension
Once vested and resigned, several options become available for managing accumulated pension benefits. Specific choices depend on whether the plan is Defined Benefit or Defined Contribution. Each option carries distinct procedural actions and tax implications.
For those vested in a Defined Benefit plan, a common option is a deferred annuity. The employee receives monthly pension payments starting at a future date, typically at the plan’s normal retirement age. Some DB plans may also offer a lump-sum rollover or cash-out option. If cashing out, the amount is generally subject to ordinary income tax and may incur a 10% early withdrawal penalty if taken before age 59½, unless rolled over into another qualified retirement account like an Individual Retirement Account (IRA).
For vested Defined Contribution plans, employees have more immediate control. A popular choice is rolling over funds to an IRA, allowing tax-deferred growth. Funds can also be rolled into a new employer’s qualified retirement plan, if accepted. Employees may also leave funds in their former employer’s plan, especially if it offers favorable investment options and low fees. A direct cash-out or withdrawal is an option, but subjects the distribution to income tax and potentially a 10% early withdrawal penalty if under 59½ years old.
Finding Information About Your Pension Plan
Understanding specific pension entitlements after resignation requires direct access to plan details. Employers are legally obligated to provide documents outlining your rights and the plan’s operational rules. Obtaining these resources is the most reliable way to ascertain your vested status and available options.
The Summary Plan Description (SPD) is a comprehensive guide to your pension plan. The SPD provides detailed information on vesting requirements, benefit calculation, and distribution options upon resignation or retirement. Employees can request their SPD from Human Resources (HR) or the plan administrator. Annual benefit statements are also typically provided, indicating your current vested balance and projected future benefits.
Direct communication with Human Resources or the plan administrator is also a practical step for personalized guidance. When contacting them, individuals should be prepared to ask specific questions relevant to their situation. Key inquiries include: “What is my current vested percentage?”, “What are my options for receiving my pension benefits if I resign?”, and “What are the tax implications associated with each distribution option?” Clarifying the exact process for initiating a rollover or distribution is also advisable to ensure a smooth transition of benefits.