You’ve been told you have the option of converting all or part of your pension plan to an immediate cash payment (a “lump sum”). What should you do? Just as important, how do you even think about this in a sensible way?
First, let’s distinguish three circumstances under which you might have the option of taking a lump sum from your pension plan:
Although each of these situations is different, most of the thought process you should go through is the same.
Even so, there is more than one way to think about this decision. Taking the lump sum means you have an immediate financial windfall. What’s more exciting than that? And who doesn’t have a mental list of great things that could be done with a windfall?
Then again, if you take the lump sum, you may be cheating your own future, or that of people who depend on you. Maybe that money is going to mean a whole lot more to you later than it does now, not least of all because if left alone, it is likely to grow.
Of course, if the lump sum amount is small, none of this matters a great deal. But if it represents more than a few paychecks to you, then it’s worth putting some serious thought into.
And that’s what this guide is for.
Lump Sum Analyzer
It’s difficult to determine the best option from the notification letter provided by the plan alone, which normally comes down to a few options to decide from.
These options boil down to the following:
Sometimes, additional options are offered which amount to relatively minor adjustments to the pension benefit.
The pension benefit may well be paid from an insurance company via an annuity which the plan may buy to reduce its risks, liabilities, and costs, such as PBGC premiums, administration expenses, investment management fees, actuarial fees, etc. Insurance companies are in the business of providing lifetime benefits and plan sponsors are allowed to do this.
Basically it is all the same whether the pension plan pays the benefits or an insurance company - you will receive the exact same benefits either way.
Your benefits are guaranteed whether they're paid from your existing pension or from an insurance company. But the nature of the guarantees differs. If you want to read about this in detail, click here.
Please click on the image of our detailed guide: "Should You Accept A Lump Sum From Your Pension Plan?" for more detail and information regarding lump sum elections...
Would you like help deciding?
By spending a bit of time with our Lump Sum Analyzer (LSA) system you can see the impact of the pension vs. lump sum using your own personal financial and other information...
Please note the Lump Sum Analyzer is operable only when coupled with data from the plan actuary when a plan is offering lump sum elections. Please contact us for more information. Thank You.