MoneyDo: Understand Your Pension and Lump Sum Payment Options

Although pensions are becoming less common across the country, workers with many years of work history may have a pension as part of their benefits.  Some companies who have pensions see the massive obligation they face and are looking for ways to avoid the long-term risk of meeting those pension obligations.

One common offering from employers is granting employees the option to receive a lump sum pension benefit – a one-time large payment instead of a monthly income for life.

If you’re an employee faced with a similar pension decision, this week’s MoneyDo is for you: understand your pension and lump sum payment options.

When faced with a lump sum decision, generally, you have 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, which is commonly referred to as 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 can be transferred into your IRA, where you can manage the investment and have greater control over the payout schedule.

Consider these factors when deciding which option is best:

  • Monthly payments will be received either over your life span, or your and your spouse’s life span. Make sure to consider your and your spouse’s health history and family health history. The longer you anticipate you and your spouse will live, the more beneficial a pension income stream may be over a lump sum payment.
  • When analyzing a pension versus lump sum payout, we also suggest looking at the health of the pension plan. An underfunded pension, or a company without a plan to fund it into the future, could leave you without income you were planning to receive.
  • If you were to take a lump sum and deposit it into your IRA, what rate of return would you estimate to earn on that investment? How long can the lump sum payment produce an equivalent monthly income compared to the pension?
  • Does the pension have a cost of living adjustment? Typically, this means the monthly payment increases every year with inflation.
  • Consider how your decision supports and enhances 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?

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.