As many of you assess the affordability of retirement, you may find one of your primary resources in the form of a pension plan offered through your employer. A pension is essentially an annuity that can provide a stream of income for someone’s lifetime. With an annuity, you are betting that you will live a long life, and the company is betting that you will not. For this reason, they are willing to pay you income for life. The calculation that they use to determine how much to pay you is based on, among other factors, your life expectancy. If you live to receive one check beyond your life expectancy, you win. If you do not, the company wins.

Those who have a pension plan know that their pension benefit is determined by a formula that usually takes age, length of service, and the prior three years worth of income into account. From this formula, employees can approximate their pension income. While most have estimated their pension income, few truly understand the benefits and consequences of the options available to them.

The primary option for those with pension plans comes in the form of a lifetime stream of income. With this option, someone who is married can select a full benefit or a partial benefit with spousal survivorship income. The full benefit typically provides the largest stream of income, but does not provide a survivorship benefit. If, for example, you passed away one year into receiving benefits, the rest of your lifetime income would be surrendered back to your employer’s pension plan.

Again, someone who is married has other options. A married retiree can decide to take a reduced benefit in order to provide a small amount of income for his/her spouse. Some companies may allow for the spouse to receive more than 75% of the original benefit upon the retiree’s death. Unlike someone who is married, if you are single or are in a domestic partner relationship, odds are you can only elect to receive the full benefit (which does not provide for your partner or other beneficiary).

Some pension plans do not even provide for nonspousal beneficiaries during employment. A gay or lesbian couple planning on receiving pension income may see this asset vanish upon the covered partner’s death—even if this occurs prior to retirement. For this reason, you may want to focus on building the investment assets for the partner without a pension plan and/or purchasing life insurance on the covered partner to protect that asset.

Another option provided by some companies is a lump sum benefit. With a lump sum benefit, the company determines your pension income and then calculates your distribution. This one-time pay out is typically the current value of all of your future income. When you receive this benefit, you can typically transfer the money to an Individual Retirement Account (IRA).

Having the money in an IRA provides you with increased flexibility over the annuity benefit. First, you can take as much money as you need from an IRA. If you have an emergency or want to take a vacation, you can dip into your IRA for those excess funds. With the annuity payment, you are set on a fixed income. Second, if you pass away, you can name your partner, family, friends, a trust, and/or a charity as your beneficiary. Third, the assets in the IRA belong to you not the company. If your company were to go bankrupt, you could see a reduction in your pension income. If the money is in your IRA, they cannot reclaim those funds. These benefits provide you with greater control over the money that you earned during your years of service with your employer.

For those who must take an annuitized income stream, you may want to consider purchasing life insurance. Many married couples use this strategy because it allows them to protect the spouse at a smaller cost than reducing the retiree’s full pension. Using this option, you can evaluate the survivor’s need, calculate the current value of that need, and purchase life insurance on the retiree for that amount.

You cannot change your election after you begin receiving your pension benefits. Working closely with a financial advisor to help you weight the pros and cons of all of your options.