Pension Annuity vs. Lump Sum: Buy What You Need Not What Someone is Sellin’

There are over 10,000 baby boomers reaching retirement age every single day, and many are faced with the decision to take a lump-sum dollar amount or an annuity payment from their employer.

I receive calls every day with questions like, “Is it worth taking a pension lump sum?” or “Is it better to take a lump sum or the annuity?” or “Is it better to take the lump sum or the monthly payments?”

All good questions, with no perfect answers. It all comes down to what you are trying to achieve with your specific situation and financial objectives. You need to weigh both the pros and cons as part of your overall retirement planning goals.

Lump-Sum or Lifetime Income?

Your “lump sum vs annuity” decision comes down to if you need a lifetime income stream or not. Regardless of what your financial advisor or agent recommends. If you do need a lifetime income, then that monthly pension amount hitting your bank account can combine with your Social Security payments to create your guaranteed income floor. The guaranteed income floor is the amount of money that comes in monthly and is not affected by the stock market or political type events. It’s an income stream that’s going to happen and that you will never outlive.

This is a huge decision, so be pragmatic and thorough about it. Take your time.

If you don’t need income, then that lump-sum payment or lump-sum distribution can be rolled into an IRA so you can invest the money as you see fit. That transfer is a non-taxable event, but you need to connect with your HR department or plan administrator to make sure that you are fully aware of the lump sum pension payout rules for your specific company retirement plan. You should also connect with a qualified tax professional, tax lawyer, or CPA to make sure you understand pension lump sum tax rules as well. This is a huge decision, so be pragmatic and thorough about it. Take your time.

So...lump sum or annuity? It depends on what you need and what you are trying to achieve. In other words, it’s your money. It’s about you and your family, not someone trying to sell you something.

80% of the time...or more

If you are leaning toward taking the lifetime income pension offer from your company, you need to shop those payment guarantees against what is offered on “the street.” Find yourself an honest agent or advisor to quote all carriers for a Single Premium Immediate Annuity (SPIA) to make sure that the offer from your company is better than what you would get from a private annuity company. Annuity payments are a commodity, and should always be shopped for the highest contractual guarantees available.

A Single Premium Immediate Annuity (SPIA) is a fixed annuity that is issued by a life insurance company and regulated at the state level. SPIAs are commodities, to find the highest guaranteed number, they need to be shopped using an annuity calculator connected to all carriers. It has to be an “apples to apples” quote comparison using the same contract parameters of the pension payments offered by your company. There are over 30 ways to contractually structure a SPIA payout, so make sure the comparison quote is exact. This is very important.

With my decades of experience in the financial services industry, I find that the private company will have the highest “pension fund” lifetime income stream guarantees when shopped against annuity companies. Over 80% of the time, your company will win that lifetime income quote.

That might be surprising until you really think about it from your company’s standpoint. They want to keep the money instead of coming up with the lump sum amount to send to you, so their lifetime income quote will typically be very competitive so they keep the money. Makes sense from the company’s standpoint.