Maximizing Your Pension Payout Options

Jun 3, 2019

Pension plans can offer retirees great security, whether they are used in conjunction with Social Security benefits or as a supplement to other retirement income streams. If you are lucky enough to have a pension in your future, you have a big decision to make. How do you want your pension distributed? It can make a difference!

You can elect to receive your benefits in a variety of annuity payout options or as a lump-sum distribution. Each option has advantages and disadvantages. So, which is the better choice for you? Let’s explore them in greater detail to see how each aligns with your particular situation and desires.

Annuity Payout Structure

Retirees looking for stability against market fluctuations tend to lean towards the annuity payout option. Why? They may get a sense of comfort knowing that they, and in some cases their spouses, will receive the same monthly payment for life. Taking the annuity payment option may also make sense if you have other retirement accounts. Receiving a set monthly amount via the pension annuity can complement a diversified portfolio that may be more heavily weighted in the stock market.

Now, for the not so great features of an annuity payout:

  • Company Financial Risk. If you worked for a company in the private sector that files for bankruptcy, your pension benefits could be jeopardized. The Pension Benefit Guaranty Corporation (PBGC) offers partial benefit protection when companies fail, but only up to certain limits.

  • Inflation Risk. Another issue is that a cost of living adjustment (COLA) often isn’t included in the annuity option. Without an annual COLA, your buying power will decrease over time as inflation rises. This can be quite impactful when you are years into your retirement.

  • Nothing for Heirs. One last thing you need to consider before opting for an annuity payout is whether or not you want to leave an inheritance to your loved ones. Under the annuity option, this isn’t a possibility. All benefit payments cease upon the death of you and potentially a spouse/partner.

Lump-Sum Distribution

The allure of receiving a large sum of money all at one time can be scary, but it can also provide flexibility and control that may be important to you. Be sure to consider how the following factors will impact you:

  • IRA Rollover. With the lump-sum option, you can roll the cash directly to an IRA with no immediate tax consequences. This will also allow the funds to continue to grow tax-deferred.

  • Eligible for Inheritance. Any assets remaining in the IRA will be passed on to others as you so choose.

  • Investment Responsibility. The lump-sum option also gives you, or your financial advisor, the opportunity to invest the funds specifically for your long-term cash flow needs. It is important that your retirement funds reflect both the security you desire as well as the growth required to meet your future financial needs. As with any investment, you assume the risk of market fluctuations.

  • Control over Distributions. Once the annuity payout option is initiated, the payment amount is set. You cannot request additional funds. With the IRA Rollover, you are able to withdraw as little or as much of the funds as you need prior to age 70 ½ years when a minimum amount is required to be distributed each year.

Treasury Department Reversal

If you are currently receiving annuity payments (referred to as “in payout status”), it’s important to take note of a recent reversal from the Treasury Department. This reversal will allow employers to once again offer lump-sum payouts to retirees to effectively buy out their pension. This was standard practice until prohibited by the Treasury in 2015 as an effort to protect retirees, specifically the elderly, from taking a lump-sum payout that may not be as beneficial as the pension benefits they are currently receiving.

If you are currently receiving annuity payments, your prior employer may send you a notice offering to buy out the remainder of your pension. Be sure to discuss this opportunity with your financial advisor to determine if it is a viable strategy given your overall comprehensive financial situation.

In Summary

Pensions are fast-becoming a thing of the past, so if you have one, you can consider yourself lucky. When it comes time to take advantage of it, be sure you are aware of the pros and cons that the annuity and lump-sum payout options have to offer and discuss them thoroughly with your financial advisor. Then enjoy this extra bit of financial security. After all, you’ve earned it!

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