Should you take a Pension Lump Sum or an Annuity Lifetime Retirement Benefit?

Should you take a Pension Lump Sum or an Annuity Lifetime Retirement Benefit?

September 04, 2020

 Should you take a Pension Lump Sum or an Annuity Lifetime Retirement Benefit?

What is a Pension?  A pension is a financial benefit that helps you create income when you retire. It is company funded only. Every year the company contributes money for you as a benefit for working and staying with the company. You do not put in your own money. Generally, the longer you stay with your company the more you are vested. Vesting means the period of time it takes to have ownership of the money (this means that you have to work for the company 5, 10 or more years to receive the funds when you leave or retire).

 Why do companies offer a Pension?

The reason many companies provide this benefit is that it is an incentive for employees to stay with them.  It is usually helpful for the company to keep qualified employees without having to retrain new employees but the company takes the risk.  Today very few companies offer this benefit. Most companies today offer stock options, and or 401k’s to help you in your future and retirement years. In the case of a 401k plan, the employee takes risk because it is their money they are contributing. 

 How to figure out your Pension benefit amount

When you have decided to retire, it is time to contact Human Resources and inform them of your decision to retire and you will be provided a future date of retirement. You will ask them about your options and how much you will receive from your pension. They well send you a form and you will request a report on the options to receive your pension.  This report will give you many choices.  One of those choices is a lump sum benefit or an option for annuitizing your pension. 

 Instant wealth pension risks

As Instant Wealth, the lump sum is a risk for you as the decisions about what to do with the money it makes a lifetime impact on your wealth. Your benefit could be $250,000 or in the millions and if you want the lump sum because you want control of your retirement funds, what will you do?  This lump sum will need to be rolled over to an If you are over 55 you may be able to take some of the pension lump sum without paying IRA or all would be taxable the year you take the money out. You want to avoid this risk.

How can you avoid a penalty on a lump sum pension payout?

The 10% penalty, which often applies if you are not age 59 1/2. There are other issues you may need to consider so talking to a Financial Planner is important before you make this big decision. 

Once you roll the pension to an IRA you will not be able to take a distribution until you reach age 59 ½ or you will incur federal and state penalties.  There are many more items to consider such as your lifestyle: make sure your money will last until you reach the grand old age of 100.   Finding a professional like me is important, in order to help you make the best decision for you. This is my passion and mission.

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About the Author:

Lillian Meyers CFP®, CDFA®, EA is a financial planner in Sonoma, California helping clients with wealth events, planning for retirement, loss of a spouse or divorce. She has decades of experience assisting clients in living their best retirement life through the use of financial planning, investment management, and other sophisticated financial options.

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