First of all, let me start by saying if you are still one of the lucky few to be working for a company who offers you a pension, congratulations. Company pensions, otherwise known as defined benefit plans, are quickly becoming a thing of the past.
Due to the increased cost of managing these plans, as well as the increased longevity of retirees, companies are opting for the more affordable, defined contribution plans such as 401ks. Lately, I’ve had a few people come up to me wanting advice on their pension. Some pensions will offer various monthly income options or a lump sum of benefits. So, which is better?
Your company will typically give you a statement of your pension benefits, assuming a projected retirement date. This statement will give you several options on how you want to receive these benefits. You have the option of receiving monthly annuity payments guaranteed for life and the option of spousal benefits. If you chose income for your life only, this would provide the highest monthly income to you.
For a reduced income, you could add a spousal benefit that would provide reduced income for you and your spouse’s life. This ensures your spouse does not lose out on this income if you predecease. One other option may be to forgo the monthly income and receiving the entire amount in a lump sum. This is known as a pension rollover. Obviously, this gives you control of your entire pension in a lump sum. If done properly, this money would be rolled over into a traditional IRA and would allow you to invest this money however you like.
If you choose to take the lump sum rollover you have options. Some people choose to use this lump sum and take a partial distribution to pay off some debts before retirement. If you choose to take a partial distribution, you must consider the tax consequences. Any distribution you take from your pension rollover is fully taxable and could be subject to the IRS 10 percent penalty if you are under age 59 ½. Although I like the idea of paying off your debts before retirement, using funds from your pension rollover may not be the best source.
Another option for your pension rollover may be to invest it for growth. If you don’t need the income immediately, you could use this money to build your retirement for potentially more future income, or to build an estate to pass on to your heirs. Our philosophy on investments has always been to manage risk using various investment vehicles to minimize or even eliminate market losses, in case of another market correction. Strategies like these are important when dealing with pension rollovers.
When deciding what to do with your pension, you do have several options. If you are looking for the maximum guaranteed lifetime immediately, taking the annuity payments within your pension will most likely be your best option. If you are looking for more flexibility on investing your pension, a lump sum rollover would work for you. Keep in mind, once you make your decision, it is irrevocable, so I highly recommend you talk to a professional advisor when making these decisions.