Pension Choices: Deciding Between a Lump Sum and an Annuity

Retirement Sign For an increasing number of new retirees, one of the important retirements choices they must make is to decide whether to receive their retirement benefits as a lump sum or an annuity. This question may also be relevant to some who retired years ago, as some former employers have reached out to their retirees to offer them lump sums in place of the annuity payments they currently receive.

In recent years more and more employers, including major employers like General Motors and Ford, have begun offering their retirees the option of a receiving a lump sum payment, instead of forcing them into an annuity, which is a series of regular payments that have a fixed total annual amount. Some employers have even contacted former employees who retired years ago, to offer to convert those retirees’ remaining benefits from an annuity to a lump-sum payment.

The reason the employers have begun moving toward lump sums has to do with long-term risk. Pension annuities typically pay retirees a monthly payment for the rest of their lives. As people are living progressively longer lives, the total long-term cost for the employer of these plans has increased commensurately. By giving retirees a lump sum, the employer reduces its long-term pension liabilities.

When deciding which option makes more sense for you, be aware the answer probably is, “It depends.” Walter Updegrave, a senior editor at Money Magazine, suggests retirees look at three key issues. First, if you need more guaranteed income than you will receive from Social Security, an annuity may make more sense, but if your Social Security income will cover your living expenses, then taking a lump sum may provide more benefits. Second, if your pension represents the vast majority of your retirement wealth, taking a lump sum and placing it in an IRA could maximize your retirement security. Third, if your plan permits you to split your benefit into a partial lump sum and a partial annuity, this could be valuable in giving you the best of both flexibility and security. Eleanor Laise, an associated editor at Kiplinger’s Retirement Report, offers a special note of caution to female retirees about lump sums. Women should think carefully before selecting a lump sum, according to Laise. Plans calculate the amount of a pension lump-sum payment based upon average life expectancies. Because women live longer, a woman who is retiring and is in average or good health, would receive a greater financial benefit from the annuity than the lump sum payment. Lump sums, on the other hand, provide better benefit for retirees in poor health who may not live to reach the average life expectancy age.

Regardless of whether you are male or female, in good or poor health, or retiring from a small or large employer, pension options appear to be increasing. To get careful and knowledgeable advice about what choice best benefits you, consult the experienced tax attorneys at Samuel C. Berger, P.C. and CPAs at S.C. Berger, P.C., who have years of helping retirees throughout New York and New Jersey. To consult our attorneys and CPAs, contact us online or call (201) 587-1500 or (212) 380-8117.

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