Since 1998, the Mid-America Pension Rights Project (MAPRP) has been assisting clients with pension issues. One question that we frequently receive is whether or not to take a lump sum payout of a pension benefit. Some employers offer a one-time lump sum payment in lieu of a traditional life-time annuity option. This option can be a benefit to both the participant and the employer.
By paying out a one-time lump sum the employer saves cost in maintenance fees and the participant does not have to wait for their money. The amount of both the annuity and the lump sum payment are determined by an actuary using the participant’s age and mortality tables. Tax consequences are not discussed within this post. It is strongly recommended that a tax expert be consulted before a decision is made.
A lump sum payment is a one time payout, which means other than the one payment, there will be no more income paid by the plan. Some of our clients who received a lump sum payment expected, at the time they received it, that they would also receive a monthly benefit.
Throughout the years the MAPRP has assisted many clients with compelling reasons for taking a one-time lump sum payment. Some of the MAPRP clients chose this payment option because they are financial wizards who love investing. A lump sum payment gives them complete control of the money by investing in funds they choose. Some clients need the money now, for crucial living expenses. The MAPRP recently helped a client who would be without heat in the upcoming winter months if the lump sum was not an option. In this case, a lump sum was the only way for him to buy a new furnace.
A terminal illness may also be a reason for choosing a lump sum distribution. By receiving a lump sum, the participant can use the money to help with their end of life expenses or as a way to fund their estate upon death.
Conversely, a life-time annuity provides the participant with a fixed monthly payment from the day of retirement for the rest of their life. An annuity is a reliable and predictable means of support during those golden years. The Plan Administrator maintains the fund for the life of the participant. A participant just has to wait each month for the money, no muss, no fuss.
Whichever option you choose, make sure that you make an informed decision. Generally, once you make the election for either type of payment there is no redo.
For more information, visit the Pension Rights Center’s website.