What Is a Federal Annuity and How Does It Work?

A federal annuity is a defined-benefit retirement plan designed to provide a steady income stream for eligible federal employees who have dedicated their careers to serving the U.S. government. This financial benefit serves as a key component of retirement planning for many in public service, offering financial security during their post-employment years.

Federal Retirement Systems

The federal government operates two primary retirement systems that provide annuities: the Civil Service Retirement System (CSRS) and the Federal Employees Retirement System (FERS). The CSRS was established on August 1, 1920, covering federal employees hired before January 1, 1987. It operates as a defined benefit plan, where the annuity amount is determined by a formula based on an employee’s salary and years of service. CSRS employees typically do not contribute to Social Security.

The FERS system, enacted by Congress in 1986 and effective January 1, 1987, replaced CSRS for new hires. FERS is a three-tiered retirement system comprising a basic annuity benefit, Social Security, and the Thrift Savings Plan (TSP). FERS employees contribute to and receive benefits from Social Security, and they also receive agency contributions to their TSP accounts.

Eligibility Requirements

Qualifying for a federal annuity involves meeting specific age and service requirements, which vary based on the retirement system and type of retirement. For voluntary immediate retirement under FERS, an employee needs to be age 62 with at least five years of service, age 60 with 20 years, or reach their Minimum Retirement Age (MRA) with 30 years of service. The MRA varies by birth year, ranging from 55 to 57. CSRS employees can retire at age 62 with five years of service, 60 with 20 years, or 55 with 30 years.

Early voluntary retirement, often referred to as Voluntary Early Retirement Authority (VERA), is offered by agencies undergoing significant restructuring or downsizing. Under VERA, employees may retire at age 50 with 20 years of creditable federal service or at any age with 25 years. These opportunities are temporary and require approval from the Office of Personnel Management (OPM).

Discontinued Service Retirement (DSR) provides an immediate annuity for employees involuntarily separated from service, not due to misconduct. Eligibility for DSR typically mirrors VERA requirements: age 50 with 20 years of service or any age with 25 years.

Disability retirement is an option for federal employees unable to perform their job duties due to disease or injury. For FERS, an employee must have at least 18 months of creditable federal service, and the disability must prevent useful and efficient service in their current position, expected to last at least one year. CSRS employees need a minimum of five years of creditable civilian service and must apply for Social Security benefits.

Calculating Your Annuity

The amount of a federal annuity is determined by an employee’s “high-3 average salary” and their years of creditable service. The high-3 average salary represents the highest average basic pay earned during any three consecutive years of federal employment. Creditable service includes time spent in federal employment for which retirement contributions were made.

For FERS employees, the basic annuity formula is one percent of the high-3 average salary multiplied by the years and months of creditable service. An enhanced factor of 1.1 percent is applied if an employee retires at age 62 or older with at least 20 years of service.

CSRS annuities use a more complex, tiered formula. The calculation involves applying different percentages to the high-3 average salary based on years of service: 1.5 percent for the first five years, 1.75 percent for the next five years, and two percent for service exceeding 10 years.

A significant component for many FERS retirees is the FERS Annuity Supplement. This supplement is designed to bridge the income gap between retirement and age 62, when Social Security benefits become available. The supplement approximates the Social Security benefit earned during FERS employment and is subject to an earnings test.

Annuity Payment and Adjustments

Federal annuity payments begin the month following an employee’s retirement date, provided all necessary paperwork has been processed. These payments are disbursed monthly via direct deposit to the annuitant’s bank account. The U.S. Office of Personnel Management (OPM) is responsible for administering these payments.

Federal annuities are subject to federal income tax. A portion of each payment is considered a tax-free return of the employee’s contributions to the retirement fund, while the remainder is taxable income. OPM provides annual statements, Form 1099R, detailing the taxable and non-taxable amounts.

Cost of Living Adjustments (COLAs) can increase annuity payments over time to help maintain purchasing power. The method of applying COLAs differs between CSRS and FERS annuities. CSRS retirees receive a full COLA, which matches the percentage change in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

FERS COLAs are calculated differently and can be smaller than the full CPI-W increase. If the CPI-W increase is 2 percent or less, the FERS COLA matches it. If the CPI-W increases between 2.01 percent and 3.0 percent, the FERS COLA is capped at 2.0 percent. Should the CPI-W increase by more than 3.0 percent, the FERS COLA is one percentage point less than the CPI-W increase. FERS annuitants do not receive COLAs until age 62, with exceptions for disability retirees and survivors.

Survivor Benefits

Federal annuities offer provisions for survivor benefits, providing a continuing income stream to eligible family members after the annuitant’s death. These benefits extend to surviving spouses and dependent children. A surviving spouse qualifies if they were married to the deceased annuitant for at least nine months, with exceptions for accidental death or if a child was born of the marriage.

Electing a survivor benefit affects the annuitant’s own annuity amount during their lifetime. For FERS, a full survivor benefit provides 50 percent of the annuitant’s gross annuity to the survivor, while a partial benefit provides 25 percent.