MoneyDo: Understand Your Pension and Lump Sum Payment Options


Although pensions are becoming less common across the country, we still live in a geographical region where a pension may be part of your compensation package. This week’s MoneyDo is Understand Your Pension and Lump Sum Payment Options.

Many people close to retirement or in retirement may be faced with a decision of what do with a pension they have earned. The pension may be from a plan that was previously frozen, and generally your payout is determined as of the date the pension was frozen.  

Generally, there are two options:

  • Receive the pension on a monthly basis for the remainder of your life. Your spouse may have more options to continue receiving payments after your passing. If that’s the case, this option would be called a joint and survivor pension. If the survivor option is chosen, it’s likely to extend the payout period, and the pension company would likely typically decrease the monthly payment amount accordingly.
  • Receive a lump sum payment which you can transfer into your IRA, where you can manage the investment and have greater control over the payout schedule.

Make sure to take time and carefully evaluate which option is best for you.  Consider these factors when deciding which option you will chose:

  • As the pension will be received either over your life span, or yours and your spouse’s, the first step is to determine estimated life span. Use the life span calculation to determine how much you would receive from the pension.
  • Most pensions are insured by Pension Benefit Guaranty Corporation, which is an independent agency of the US government created to encourage the continuity and maintenance of retirement plans. When analyzing a pension versus lump sum payout, we also suggest looking at the health of the pension plan. Is it underfunded? If so, does the organization have the means to fund it in the future?
  • If you were to take a lump sum and deposit that into your IRA, what rate of return would you expect to earn on that investment?
  • Does the pension have a cost of living adjustment? Typically this means the payment increases every year with inflation.
  • How does your decision support and enhance your financial plan? Does your plan require a stable payment, or would can your plan withstand the potential volatility of investing the money in the market?
  • Will you need access to the funds at a faster rate than your monthly pension payment?

After you consider all these factors, look at the return you would have to achieve on the lump sum payment, and how it compares to the cash flow you’ll receive on pension payments.

Sometimes pensions can be hard to wade through, and even harder to interpret into your own financial plan. If you have questions find an advisor you can trust to help you with this important asset. At Annex Wealth Management, we have a team of experts who will advise you on choosing the path that’s in your best interest.

Sign Up For the Axiom

7 Weekly Wealth
Management Insights

Sign Up For the Axiom

7 Weekly Wealth
Management Insights

Contact Us

Annex Wealth Management
12700 W. Bluemound Rd.
Suite 200
Elm Grove, WI 53122

Call: (262) 786-6363
Fax: (262) 792-8930

Generic filters
Exact matches only

This site has been published for residents of: AZ, CA, CO, FL, IL, MI, MN, MO, NC, NH, OH, SC, TN, TX & WI ONLY. By entering you certify you are a resident of one of those states. All information herein has been prepared solely for information purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell, any security.