Lump Sum Pension Options Are Growing In Popularity

During the nearly 30 years that I have worked in the financial services industry, I have evaluated a bucketful of lump sum pension options for clients and contacts. The most valuable caveat I share with people is their need to answer a very personal question: how disciplined they are. When someone takes a lump sum from their former employer’s pension plan, they must now exercise a level of discipline that they may not have been used to in their lifetime. When retirement funds are in an employer account, they are often difficult (if not impossible) to obtain—there is no “ATM Card” that comes with employer plans. On the other hand, if someone decides to transfer (transfer) funds from their employer’s plan to their own IRA, their access to those funds becomes much easier. I have witnessed several clients who have transferred funds or inherited money and, for a few years, the temptation to take the funds (even paying considerable taxes) is too great. They end up with a heavily depleted account when it comes time to retire.

Nowadays, more and more companies are trying to get rid of the burden of managing their employees’ pension funds. With all the mergers and acquisitions, people living longer, and the ongoing administration expenses of maintaining and paying out funds for decades, companies are more apt to offer employees competitive lump-sum options. In addition, there appears to be a growing mistrust among former employees of their previous employers, and that mistrust is increasing the popularity of these employees for withdrawing funds from corporate plans and placing them in their personal IRAs.

Over the years, when I completed an analysis of a lump sum option, it was rare for a commercial annuity insurer to outperform the lifetime payment option offered by the corporate pension plan. However, I have recently noticed that with certain employers in my region that have merged or been acquired, or have decided to greatly reduce their workforce, commercial annuity insurers are meeting and sometimes even exceeding plan benefits. offered by the corporate plan.

In these cases, the decision to transfer the funds becomes easier, but the point I raised in paragraph 1, discipline, needs to be addressed and understood. One of the worst things that can happen is when a 50 year old decides to take a lump sum option with the full intention of rolling it over and letting it sit and grow for their future, and then over the next 10 to 15 years it falls apart. . in the account by making early withdrawals only then to find themselves with a significantly smaller amount of money and therefore a smaller monthly payment throughout their retirement years.

Also, when making a social security payment decision along with deciding which monthly payment option to take with employer-based funds (either through a corporate plan or a business annuity plan), it is very important to consider the impact of a person dying prematurely. and what that can do to a surviving spouse. I have been involved with widows (widowers) who have been left in difficult financial situations because their spouse chose to take the higher benefit amount (based only on her lifetime) and then died prematurely. It is very important to seek advice when making social security and pension elections, which generally cannot be modified once selected.

In closing, if you are faced with a lump sum pension option with a former employer, take the time to evaluate the option. I would encourage you to get some professional advice and advice to ensure you have as much information in front of you to make the best possible decision.