Pension/Lump Sum

Do most companies offer the option of collecting a pension as a lump sum payout instead?

I worked for one company long enough to qualify for a smaller pension at age 65 (later this decade). Since it isn’t a COLA pension, I think if given a choice I’d probably prefer the lump sum. I will have another COLA pension that will provide some steady income.

Do you usually have to contact the previous employer’s HR office to find out the options?

Thanks
Rich

Do most companies offer the option of collecting a pension as a lump sum payout instead?

Many do. Not sure if it’s most.

I think if given a choice I’d probably prefer the lump sum. I will have another COLA pension that will provide some steady income.

Nice that you have a COLA pension. I would point out that SS is effectively another COLA pension.

If you do take a lump sum (and you should analyze the offer they are giving you carefully) you should be able to avoid taxes on the lump sum by rolling it into a Traditional IRA. That way, you won’t be pushed into higher bracket on the lump sum, and can withdraw or convert it over time. Of course, if you already have a Traditional balance that will push you into a higher bracket when you start taking RMDS, rolling the lump sum into a Traditional IRA will exacerbate the issue, which should be considered when doing your analysis.

Do you usually have to contact the previous employer’s HR office to find out the options?

They (or their pension administrator) should actually be contacting you at least annually with an annual report on how well funded the pension is. If you haven’t been getting that, then you need to contact them in any case, because they have probably lost track of you. If you have been getting that annual report, but haven’t ben getting any buy-out offers or information on different options (beneficiaries, etc.) for taking your pension, then yes, you will need to contact them.

AJ

7 Likes

Maintaining the buying power of a lump sum requires making good investment choices. For the skilled, that may not be difficult as the bar is set fairly low for the investments managed by insurance companies and pensions, etc.

Not everyone has the skill needed. Then the cola is a better choice. Professionally managed. Guaranteed. Reliable.

1 Like

Maintaining the buying power of a lump sum requires making good investment choices. For the skilled, that may not be difficult as the bar is set fairly low for the investments managed by insurance companies and pensions, etc.

Not everyone has the skill needed. Then the cola is a better choice. Professionally managed. Guaranteed. Reliable.

I would point out that the pension the OP is considering taking the lump sum on is a non-COLA pension, and that they are leaving the COLA pension in place. The OP said Since it isn’t a COLA pension, I think if given a choice I’d probably prefer the lump sum. I will have another COLA pension that will provide some steady income.

AJ

1 Like

pauleckler: "Maintaining the buying power of a lump sum requires making good investment choices. For the skilled, that may not be difficult as the bar is set fairly low for the investments managed by insurance companies and pensions, etc.

Not everyone has the skill needed. . . . Professionally managed. Guaranteed. Reliable."

Even without a cola, a lump sum may not be that good of a deal.

One of my previous employers offered a pension buyout and it was a crappy offer.

Significantly less than what was necessary to purchase an equivalent private annuity with similar payment terms.

And it would have required a not insignificant return to growth it to age 65 and then purchase a lump immediate annuity with similar payment terms.

I know nothing about ERISA, but it seems to me that many pension buyouts are designed to benefit the company by paying cash to get former employees to take the investment risk (also losing PBGC benefits, too) and live with the results.

Regards, JAFO

2 Likes

Do most companies offer the option of collecting a pension as a lump sum payout instead?

The Pension Protection Act of 2006 can have a significant impact on lump sum distributions from a company’s pension plan. While the company’s pension plan may state that a lump sum distribution is an option, the Pension Protection Act restricts the lump sum distribution based on funding of the company’s pension plan current and future liabilities.

As I recall the Act allows 100% of the company’s lump sum option to be distributed if the pension liabilities funding is greater than 90%. If the pension liabilities are funded below 90% but above 75%, only 50% of the lump sum option can be distributed as a lump sum. Below the 75% funding level, the pension has to be taken as an annuity.

You need to check with HR to find out what if any of your lump sum option is available to you.

Even without a cola, a lump sum may not be that good of a deal.

One of my previous employers offered a pension buyout and it was a crappy offer.

Significantly less than what was necessary to purchase an equivalent private annuity with similar payment terms.

Yep, that’s one reason that you need to analyze any pension buyout offer carefully.

AJ

And note that the buyout offer is based on the current value of the promised pension benefit. Its affected by interest rates. Low interest rates should result in a larger lump sum amount.

Thanks.

I don’t believe my non-COLA pension provides a lump sum option at this time (checked with an ex-coworker and did a scan of the plan’s brochure). That pension I receive at 65.

My COLA pension I have no interest in taking as a lump sum (and it isn’t offered anyhow). My wife has a very small pension and I do know that one can be taken as a lump sum and we will probably do that.

I was trying to do more analysis of my finances because all of the accounts I now have due to inheriting money from my father.Basically I think from 60-67 I will be withdrawing 3-4% to supplement my pension (COLA one). Then at 67 or so once we start social security (most likely the wife at 67 and me at 70) we would probably be down to 0-2% withdrawals.

Although I won’t be actually withdrawing the money for a while since I’ve set aside some cash to cover the first 4+ years in a couple of 3 yr MYGAs.

At this time I"m strongly leaning towards retirement at the end of the year. If I happen to find something I can do from home 4 days a week I might work a bit longer but otherwise I think retirement is looking good to me.

2 Likes

I know nothing about ERISA, but it seems to me that many pension buyouts are designed to benefit the company by paying cash to get former employees to take the investment risk (also losing PBGC benefits, too) and live with the results.

I have two pensions from former Fortune 500 employers. Both offered me lump sums for the pension benefit prior to age 65, but they were 10%-15% less than my estimate of the actuarial value of the pension, so I declined.

I agree with JAFO. If they’re offering you a lump sum, it’s likely for the company’s benefit.

intercst

1 Like

I should add that I’m getting a pension from Exxon even though I only spent a bit over 5 years with Exxon and vesting at the time was 10 years.

So how did I get a pension?

A few months before I left. Exxon management raided the pension fund and took the “overfunding” for “other corporate purposes” like big increases to executive compensation. When they do that, everyone in the pension fund suddenly gets vested after 5 years.

So corporate greed ironically and accidently got me an additional pension.

intercst

3 Likes

I have two pensions from former Fortune 500 employers. Both offered me lump sums for the pension benefit prior to age 65, but they were 10%-15% less than my estimate of the actuarial value of the pension, so I declined.

If the company’s pension plan states that 65 is their retirement age and you claim your pension prior to that age, the lump sum for the pension benefit will be reduced due to the longer payout period of the annuity.

If the company’s pension plan states that 65 is their retirement age and you claim your pension after that age, the Pension Protection Act requires that the pension benefits be recalculated for the shorter payout period for an annuity. I retired at 68. After the actuary finished his calculations, my lump sum distribution option increased by 21%. I took the lump sum.

I agree with JAFO. If they’re offering you a lump sum, it’s likely for the company’s benefit.

I concur. The insurer that provided the annuity was giving my former employer roughly a 5% discount from what I could purchase an immediate annuity providing the same benefit.

3 Likes

MCCrockett:

intercst: {{{I have two pensions from former Fortune 500 employers. Both offered me lump sums for the pension benefit prior to age 65, but they were 10%-15% less than my estimate of the actuarial value of the pension, so I declined.}}}

“If the company’s pension plan states that 65 is their retirement age and you claim your pension prior to that age, the lump sum for the pension benefit will be reduced due to the longer payout period of the annuity.”

That was not it in my case. I priced a single premium annuity that started no earlier than the pension that was being bought out. It was a buy out and not an early start option, this there was no longer payout period.

Regards, JAFO