How Should I Take My Pension?

If you’re leaning toward choosing guaranteed lifetime income by remaining in the plan instead of taking the lump-sum offer, be sure you have confidence in your employer’s long-term viability.
July 2, 2020

The number of pension plans decreased to just 46,700 in 2017, from 103,000 in 1975. At the same time, defined-contribution plans, such as the 401(k) grew to 662,800, from 207,700, says CNBC’s recent article entitled “Pandemic creates pension plan tension: Take the lump sum or trust lifetime payments.”

With so many companies trying to regain their financial footing in the coronavirus pandemic, a retiring employee’s decision to take either a lump sum or lifetime payments from their pension might end up in one simple question: whether they believe that the company will be able to meet its long-term commitments. It’s one of the primary considerations that employees have, when doing this kind of analysis.

A tricky part of making a decision about how to receive your pension benefits is that retirees typically like the idea of guaranteed income for life, which makes electing continuing payments more appealing than a lump sum.

If you want to stay on as a plan participant, make sure you have confidence in the company’s ability to make those future payments. While the federal Pension Benefit Guaranty Corporation (PBGC) would step in if the company failed to meet its obligations, it may pay only a portion of promised benefits.

If you’re thinking about a lump sum, due to fear of your employer folding or otherwise struggling to meet its pension obligations, know that the amount offered is usually less in comparison to the amount you’re promised to get, over time, if you were to stay in the plan. However, because interest rates are generally low, lump sum offers have been bigger than they’d be if rates were high. Consequently, when interest rates go up, the guaranteed-income option is higher, and the lump sums go down.

If you opt to remain in the pension plan rather than taking the lump sum, the amount you’ll get may be fixed for life, because pensions typically don’t have a cost-of-living adjustment. While some pensions offer spousal benefits (when you die, your spouse would continue getting a continuing, but reduced amount of your payments), there’s nothing left for heirs. Therefore, death ends the plan’s obligations to you, your family and your heirs.

Alternatively, if you take the lump sum, you might have some money remaining at the end of your life that could be left to non-spousal heirs.

Any decision should be made with regard for the rest of your financial plan. It is worth making certain you believe in the company’s long-term viability. The counsel of an experienced financial advisor and estate planning attorney should be sought when evaluating your options.

Reference: CNBC (June 8, 2020) “Pandemic creates pension plan tension: Take the lump sum or trust lifetime payments”

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