The Fundamental Questions When Comparing Pension Annuities vs. a Lump Sum

Make sure you're getting the most out of your retirement and not falling into the common traps of the industry. Here are some key things to look for when comparing Pension Annuities vs. Lump Sums.

Lump Sum or Annuity?

There are many people out there that are retiring from their companies, and some companies will offer two choices. They will either give X amount, lump sum or provide a guaranteed annuity payment, pension payment for the rest of your life. However, not all companies do that. So if you're with a company that does, consider yourself fortunate because many people don't have that offer, and they've got to take a 401k and then figure out how to create a pension plan.

The fundamental question is, Do you and your spouse or partner need retirement income? If the answer is yes, you need to look at what that payment is and then shop it with all other carriers to find the highest contractual guarantee. The bottom line is that if you need income, you buy the contractual guarantee. Annuities are commodities.

So, if your company has the highest contractual guarantee, then that's fine. Do not fall in love with the name; fall in love with the number. In combination with your Social Security payments, what you're doing is creating your lifetime income floor. Those are the payments that hit your bank account every month that you do not have to worry about.

Guaranteed Payment

In my experience, over 80% of the time, the guaranteed annuity payment from your company will be higher than the street. The company that you work for knows what they're offering, and they have made sure, in most cases, that their payment is higher. If you choose to take the lifetime income stream from your company, they get to keep the lump sum, and they're just paying that payment back to you over your life expectancy. So they don't have to come up with a lump sum. So, if their guaranteed payment amount is not the highest, you're going to Go Back to them and ask for the lump-sum payment and find an outside life insurance company to find the highest possible, guaranteed income for payment. Use our calculators so that you know that you've done all you can to find the highest contractual guarantee for you and your family in the back of your mind.

Is it Taxable?

No, it would not. Let's just say that you don't need the income, and you want to transfer the lump sum to an IRA somewhere, and trade the money and invest in a non-annuity. Okay, that's fine. It's a transfer from your company's plan to an IRA established in your name, and it's a nontaxable event. Even if you take the lump sum and put it into an annuity to pay a pension type payment for the rest of your life, or your spouse or partner's life, it's still a nontaxable event that will not trigger any taxes.

The assets will go from your defined benefit plan or employer-sponsored plan to your personal IRA, IRS approved. When you start getting the income from that, you will have to pay taxes on that income stream, but the transfer is a nontaxable event. I want you to understand that because many people assume that they have to take that lifetime income stream from the company because if they take the lump sum, it'll trigger taxes. It will not, and my staff and I will ensure that all the I's are dotted, and the T's are crossed so that when you make that transfer, it's an entirely nontaxable event.

Claims Paying Ability (CPA)

The preliminary decision is, do you need income or not?

Well, I think the preliminary decision is, do you need income or not? If the answer is yes, then you have to shop around for the best contractual guarantees. The one issue you need to be aware of is the claims-paying ability of either your company (if you want to keep the money with them and have them pay you out for the rest of your life) or the annuity company that provides the highest contractual guarantee. If you're going to get a lifetime income guarantee, you have to make sure that either your company or the company you choose has the claims-paying ability. That is why a federal agency called the pension benefit guaranty corporation backs up pension funds from companies. However, don’t put a lot of faith in that. I advise you to look at your company’s financials, and if you feel comfortable and had the highest contractual guarantee payout, then fine.

Now, let's just say you transfer it out to an annuity company to find the highest contractual guarantee. I have a fiduciary responsibility to make sure that we're choosing. A company that can back up those claims can pay you for the rest of your life, Regardless of how long you or your partner lives if you set it up to be joint. Still, I would focus your efforts on the claims-paying ability of the carriers.

Bottom line, you have to make sure that you feel comfortable that whoever you choose, your company or the annuity company, can back up those claims, and that can pay you for the rest of your life regardless of how long you live.

Although this may seem intimidating, it can be worth the added value to your lifetime income plan. So book a call with me, and we can begin to discuss what works best for you.