Pension Withdrawal Strategy

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11/9/2023

Updated:

11/10/2023

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When you have a pension and retirement looms, you must make some decisions. The question is, should you take one lump sum or an annuity?

There are pros and cons for both strategies. The decision affects your financial future, so you don’t want to take it lightly. What is the best course of action?

Pension Annuity Lasts a Lifetime

An annuity means your pension will be paid monthly for your remaining life. An annuity is a guaranteed income and does not vary because of market performance. Although the amount is fixed, some plans have a cost-of-living adjustment (COLA). But check your plan because not all companies offer a COLA.

You can go to this federal Employee Benefits Security Administration lifetime income calculator to determine your monthly payment.

One Lump Sum Invested

A lump sum is a one-time payment. You will not receive a steady stream of monthly installments throughout your lifetime.

The responsibility for managing the money shifts from the employer to you.

Income and Taxes

An annuity doesn’t vary with market fluctuations. The investment remains with your company. If there is a downturn in the market, the company will have to add additional funds to the pension to make your installment payments.

If you receive a one-time lump sum, you can invest it and possibly increase its worth—but you also incur the risk. If there is an unfavorable fluctuation in the market, you could lose your nest egg.

Pension payments are taxable income. You will be taxed on the entire amount if a lump sum is taken. The exception is if you roll over the funds to an individual retirement account (IRA) or another employer-sponsored retirement plan.

Life Expectancy a Factor

Consider your health and expected lifespan when making a decision. If you are in good health and expect to live a long time, annuity payments might be your best decision. Throughout your life, you will have monthly payments. You cannot outlive annuity payments.

But a lump sum may be the right choice if you are in poor health or don’t expect a long lifespan. It also depends on if you have a surviving spouse.

Family Affected by Choice

Will your spouse need support after you’re gone? A lump sum could be invested to help secure your spouse’s future. It can also be left to your beneficiaries. Check with a financial advisor and determine what returns you would receive by investing.

There are usually some options with an annuity. For example, you can do a 50 percent joint survivor annuity if you have a spouse. The monthly payment will be lower while you both are alive, but your spouse will receive payments after you pass.

If your spouse passes first, you can usually return to full payments.

You also could do a 100 percent joint survivor. A lower than 50 percent payment installment will go to you monthly, but your spouse will receive 100 percent once you pass.

Another type of installment is a single-life payment. This usually pays the highest. But when you pass, your beneficiaries do not receive any payments—the payments only last while you live.

And, finally, you could choose a single life with term certain. The monthly payment will be less while you live, but once you pass, your heirs will receive a payment for a preset number of years.

Company’s Financial Stability

Check the credit rating of your company if you are considering an annuity. If your company is experiencing financial problems, they may default on their pension fund obligations.

There is a federal agency that provides pension fund protection for participants in the private sector. If your annuity provider goes bankrupt or defaults on the pension, The Pension Benefit Guaranty Corporation (PBGC) steps in.

But the PBGC protection is limited. Although most retirees receive their full pension, there’s still a risk that you won’t. If you are concerned with your company’s solvency, consider going it alone and taking the lump sum.

Pros and Cons of an Annuity

With an annuity, you receive a monthly benefit for life. From a psychological and financial planning aspect, this is comforting. It’s like keeping your paycheck going. You also may be able to provide security for your spouse.

But with an annuity, you have limited financial flexibility. You also may not have benefits for your heirs. You also must consider your health and longevity.

Pros and Cons of One Lump Sum

A lump sum can be used to pay off all debts, and you can pass some on to your heirs. You also have the flexibility of investing and growing the principal.

Although you have the flexibility to invest, you could also lose the funds if there’s a downturn.

The main risk is that you could outlive your pension if you don’t manage it correctly.

An Annuity vs. Lump-Sum Payment

Consider your circumstances and risk tolerance when deciding on an annuity or lump-sum payment.

It would be wise to consult with a financial advisor and tax attorney. But check the financial interests of those advising you and ensure they have your best interests at heart.

This is a lifelong retirement you’re considering; take your time when deciding.

The Epoch Times copyright © 2023. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.