Pension Fund or Retirement Annuity: How Each Work

Pension fund or retirement annuity—what's better? We're going to find out and answer the questions to help you make an informed and rational decision. Oh yes, I'm Stan The Annuity Man, America's annuity agent, licensed in all 50 states.

Pension Fund Options and What You Need to Know

For those of you working at a large company with a pension fund, you're one of the few. Less than 10% of private companies offer pension plans. When they do offer a pension, and you're nearing retirement, they'll likely ask, "Do you want to take the pension or the lump sum?" That's a really good question, and you need to reach out to me at The Annuity Man.

What we'll do is take their lifetime income stream quote and run that through all carriers in the private sector to make sure you're getting the best contractual guarantee.

You don't always have to take their pension annuity. They'll say, "Hey, we'll pay you X amount per month or give you a lump sum," and that sounds straightforward, but 99% of the time, it's a simple choice. If you don't need income, take the lump sum and invest it. But if you need the lifetime income stream, there are a few things you need to check. Let's go over them now.

Deciding Between the Pension or Lump Sum

Your company might offer you a lump sum or an income stream, like $2,500 a month for your lifetime or joint lifetime. If you don't need income, taking the lump sum is easy. But if you need guaranteed income as part of your overall income floor, and they're offering $2,500/month, send me that quote. I'll compare it against the best options on the market to see if it's a good deal. Here's the interesting part: I've been doing this for a long time, and about 80-85% of the time, the pension offer from the company is higher than what other carriers can offer.

So, why is that? It's because the company wants to hold onto your money. If their lifetime income stream offer is the highest, they only need to pay you $2,500 a month for the rest of your life. They're trying to keep your lump sum. But you need to find out if this is true for your situation—that's where I come in. In most cases, I'll say, "Hey, stay with your company. They have the best offer."

The other factor to consider is the Claims-Paying Ability of your company. Are they solid? Can you trust them? These are valid questions because they're on the hook to pay you for life. There's also something called the Pension Benefit Guarantee Corporation (PBGC) that backs up these pensions, which is a government entity, so that's a good safety net.

The Private Sector Annuity World

Now, let's talk about the options in the private sector annuity world, where we can compare all carriers. As we've said, if you're looking for immediate income, your company may have the best offer. But if they don't, we would quote Single Premium Immediate Annuities (SPIAs) from other carriers to see if their offer is better.

Let's go back to the example where the company offers you a $400,000 lump sum or an income stream. If you don't need income right now but want income guarantees for the future (to address inflation or provide for your spouse), you could take the lump sum and do a transfer (non-taxable event) into income-later strategies. You can defer income for 13 months or as far out as 20, 30, or even 40 years, depending on your situation.

We would quote Deferred Income Annuities, QLACs (Qualified Longevity Annuity Contracts), or Income Riders to find the highest contractual guarantee for your situation. For example, if you're retiring at 62 and want to defer income until you're 75, we would quote Deferred Income Annuities, Income Riders, and QLACs (which currently have a premium limitation of $135,000 or 25% of your IRA in 2020). We'd run these quotes to find the highest contractual guarantee for your specific situation.

Deciding Between No Annuity or Using a Lump Sum for Investment

Another option is simply to take the lump sum and invest it yourself. That's a viable choice if you're confident in your investment strategy.

Also, download my books on these topics. I've written six annuity owner's manuals, each about 60-70 pages, explaining products like longevity annuities, QLACs, and more. They're easy to understand, and you can download them for free, with no obligation.

Remember, deciding between pension funds and retirement annuities is all about understanding your options and making the best choice for your financial future.