Objective information about retirement, financial planning and investments


Pension Payments – Annuity or Lump-Sum?


I’m often asked by folks approaching retirement whether to take their pension as a lump-sum payment or as an annuity (a stream of monthly payments).  Investment News recently published this excellent piece on this topic which is worth reading.

As with much in the realm of financial planning the answer is that “it depends.”  Everybody’s situation is different.  Here are some factors to consider in deciding whether to take your pension payments as an annuity or as a lump-sum.

Factors to consider 

Among the factors to consider in determining whether to take your pension payments as an annuity or as a lump-sum are: 

  • What other retirement assets do you have?  These might include:
    • IRA accounts
    • 401(k) or 403(b) accounts
    • Taxable investments such as stocks, bonds, mutual funds, or others
    • Cash and CDs
  • Will you be eligible for Social Security?
  • Will the monthly pension payments be fixed or will they include cost of living increases?
  • Are you comfortable managing a lump-sum yourself and/or do you have a trusted financial advisor to help you?
  • What are your expectations for future inflation? 
  • What is your current tax situation and what are your expectations for the future?

Factors that favor taking payments as an annuity 

An annuity might be the right option for you if:

  • You have sufficient other retirement resources and are seeking to diversify your sources of income during retirement.
  • You are uncomfortable with managing a large lump sum distribution.
  • You are not eligible for Social Security.
  • Your pension payments have potential cost of living increases built-in (typical for public sector plans but not for private pensions).

Factors that favor taking payments as a lump-sum 

A lump-sum distribution might be the right option for you if:

  • You are comfortable managing your own investments and/or work with a financial advisor with whom you are comfortable.
  • You have doubts about the future solvency of the organization offering the pension.  This pertains to both a public entity (can you say Detroit?) and to a for-profit company.  In the latter case pension payments are guaranteed up to certain monthly limits set by the PBGC.  If you were a high-earner and your monthly payment exceeds this limit you could see your monthly payment reduced.
  • You are eligible for Social Security payments. 

The factors listed above favoring either the annuity or lump-sum options are not meant to be complete lists, but rather are intended to stimulate your thinking if you are fortunate enough to have a pension plan and the plan offers both payment options.  A full listing for each option would be much longer and might vary based upon your unique situation.

Moreover the decision as to how to take your pension payments should be made in the overall context of your retirement and financial planning efforts.  How does each payment method fit?

Lastly those evaluating these options should be aware of predatory financial advisors seeking to convince retirees from major corporations and other large organizations to roll their retirement plan distributions over to IRA accounts with their firm.  While this issue has seen a lot of recent press in terms of 401(k) plans it is also an issue for those eligible for a lump-sum pension distribution. If you are working with a trusted financial advisor an IRA rollover can be a viable option, but in some cases rollovers have been directed to questionable investment options putting many retirement investors at risk.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

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The GM Pension Do Over – Cadillac or Chevy?


As you may have seen in the news, General Motors is offering some of its former employees what amounts to a pension do over.  I met with one of these former employees recently to discuss this offer in the context of potentially doing a financial plan for him and his wife.

He has been retired from GM for several years and has been drawing a monthly benefit.  He was recently offered three options:

  • Keep his current monthly benefit.
  • Take a lump-sum distribution.
  • Change his monthly benefit to one of two new options that would involve annuities via Prudential.

For the prospective client this was the “life event” that prompted him to come and meet with me.  In his case, their overall financial situation allows them to fully consider all three options.

As you are likely aware, GM’s motivation for offering this program is to remove the liability for their future benefits from the GM balance sheet.  Let’s briefly look at the three options.

Stay with their current monthly benefit.  In this case the prospective client took an annuity payment with a 65% benefit for his wife should he predecease her.  His current benefit is lower than either of the two new annuity options that are offered via Prudential.  However, regardless of his choice, the liability for providing the monthly benefit is shifted from GM to Prudential.  This means the beneficiary is now relying on the full faith and credit of Prudential.  This is not necessarily a bad thing as Prudential seems to be a solid company.  The skeptics among you might say that so was AIG (or at least they were perceived as such) prior to 2008.  The other consideration is that by moving to the Prudential option one would lose any PBGC (the government organization that insures pension benefits) protection should GM encounter financial difficulties in the future.  Should Prudential encounter financial problems beneficiaries would need to rely on the resources of various state insurance departments, this may be perceived as iffy in these tenuous times for many states.

Move to the new higher Prudential Payouts.  As mentioned above, there are two payout options.  One offers a 50% benefit to his wife should he die first, the other offers a 75% benefit.  The monthly benefit is higher for the first option; both options offer a higher monthly benefit than his current benefit via GM.  Not all retirees are eligible for these additional options, however.  Regardless of his choice, the liability for all future monthly annuity payments will be shifted to Prudential.

Take a lump-sum distribution.  This option allows you to take the lump-sum value of your pension benefit as a distribution.  For most people considering this option the best move would be to roll this amount over to an IRA account in order to preserve the tax-deferred status of the money.  A distribution in cash would trigger taxes and could be quite costly.  This option allows you the ability to manage this money and the distributions.  This can be a good option for those do it yourselfers who are comfortable doing this and for those who work with a trusted financial advisor.  One downside is the loss of the guaranteed income that comes with any of the annuity payout options.

In the case of my perspective client and in the case of many, this decision will be made in the context of their overall financial situation.  My perspective client has other financial resources and his wife plans to continue her professional career for the foreseeable future.  Their current income is fairly high and they have the ability to continue to accumulate retirement assets for several more years.

Others faced with this decision may be in different circumstances which they will need to consider in making this choice, in addition to the features of the choices themselves.

The broader implications of this move by GM may be seen down the road.  Pension costs are a major financial burden for many companies large and small.  The GM pensions were part of the very rich benefits packages won over the years by the auto unions and are very costly to GM on their own.  Current historically low-interest rates work against the funding status of the pension liabilities of domestic organizations offering defined benefit pension plans, both active and those with frozen benefit levels.  These lower interest rates result in higher required pension contributions, a drain on corporate profits and cash flow.  In the case of public pensions this is a tremendous drain on the state and local coffers as we’ve seen here in Illinois.  If this GM move is successful I suspect other companies will follow GM’s lead.  Many other retirees currently receiving pension benefits may find themselves faced with a similar choice to make.

If you need help evaluating your pension options or with financial planning for your retirement please feel free to contact me to discuss your situation.