Take The Lump Sum Or The Pension?

You have spent 20 or 30 years working for the same company and now it is time to retire.    You have put money away in your 401(k) and some other savings, but your really large asset is the pension plan where money has been put away for you all of these years.     Your human resources or benefits department sends you this large packet of information telling you what options you have with your pension.   Unbeknownst to you, they tell you that you can either get one check in a lump sum or they offer you various options if you choose a lifetime pension.  So, what is the best direction to take with your pension plan?

Part I- Taking The Pension

The first option you have is to take the pension.   One of the things to consider up front is that taking the pension allows you to remove the stress of ever having to manage the money.  Essentially, you are turning over your lump sum to an insurance company or the master pension fund and in return they are giving you a payout at a predetermined interest rate.    When you make the decision to take the pension, it is normally a final decision.  This means you can’t go back a year later and ask for the lump sum because you changed your mind.

Generally, you will have several different payout options.  The first is going to be a straight life pension.   This will normally be your highest payout from the pension as it will pay you a monthly amount for the rest of your life.  However, if you die three months later, the pension is gone permanently, and will not continue to pay your spouse or partner.  A second option would be to take a reduced pension with what is called an installment refund annuity or an annuity with period certain.    Even though your payout amount will be lower with this option, it will guarantee the pension continues for a spouse or partner for a certain amount of years (5, 10,20, etc.) or pay installments until the ‘lump sum’ amount is met.     The final option I normally see is a Joint with Rights of Survivorship type pension election.   This would reduce your monthly pension payment by a significant amount, but it would allow your spouse or partner to get either 50% or 75% of your pension in most cases for the rest of their lives should you predecease them.

While taking the pension can allow you remove the stress of managing the money and can offer a fixed monthly amount that you can’t outlive, it is not without its drawbacks.   The pension that you receive may be guaranteed based upon the future financial stability of your employer.   You will want to know what the reserves are in the pension fund and that it is backed by the Pension Benefit Guarantee Corporation (PBGC).  Also, most pension payouts are not adjusted to move with the cost of inflation.   If you begin taking payments at age 65, they may only be worth about half in 20 years if inflation moves along at 3% plus per year.

If you are really healthy at the time you take your pension, you may want to consider a pension maximization strategy which means taking the single life only pension choice, and then spending enough cash to buy a life insurance policy on yourself to recreate the survivor pension for your spouse if you die early.  By using    this strategy, if your spouse predeceases you then you’ll still have the full pension amount and possibly some additional cash value in an insurance policy.

Part II- Taking The Lump Sum

The second option you’ll have is to take the lump sum.  If you like the idea of controlling all of your assets versus the pension company having the assets, this can be an excellent option.   With the lump sum option, you are going to want to make sure you do a direct rollover into an IRA just like you would have with your 401(k) plan.   If you took the pension as lump sum of cash, you would be subject to taxation (and possibly penalties depending on your age) that would be really adverse to your financial situation.  Make sure you fill out the paperwork correctly, as this decision will be final once you elect it on your pension forms.

When you take the lump sum, one of the big pros is that you now have access to your money.   If you needed a larger chunk of cash for some reason throughout your retirement, the money would be accessible to you at anytime.     Your pension will now have a named beneficiary as well once your roll it over to an IRA, which means it will be there for a spouse, partner, or kids should you die.    Also, if you manage your account well, it could actually grow throughout your retirement while you distribute income from it at the same time.

However, taking the lump sum may not be cracked up to all of the hype.    The first thing is that you need to make sure you can find an investment strategy that will generate the necessary income throughout your retirement.    The investments that you choose may not be guaranteed like your pension.   Also, if you put money in the stock market or other investments, you could run the risk of losing your principal which would be very costly once you retire since you won’t have as many years now to make up the losses on your cash.     The last part of this is that the money is accessible to you.     Sometimes, when money is in our pocket it can burn a hole from our excitement to go make new purchases.        You need to really think about this lump sum as money to recreate your pension rather than buying items you need throughout retirement.

Part III- The Decision

It is highly recommended that you get a qualified pension, tax, or financial advisor to help you run a thorough analysis before you make this election.   Remember, once you decide on which route you will take, the decision is irreversible.  Ultimately, you should be able to figure out what the real internal rate of return is on the pension if you choose the payout and then try to decide if you think you can build an investment portfolio that will do better than that rate.    You can always send me a note here at Your Smart Money Moves if you can’t make the calculation yourself!     Good luck on ‘the decision’ . . . where will your money take your talents?

Written by:

Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®

Co-CEO and Founder of oXYGen Financial, Inc – The Leaders in Gen X & Y Financial Advice and Services

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About the author  ⁄ Ted Jenkin @ Your Smart Money Moves

Ted Jenkin @ Your Smart Money Moves


My friends and family all think I’m a workaholic, but I say I’m just a guy that loves to help people do better in life.

My mother is still the only one that calls me by my real name Theodore Michael, my wife calls me Teddy, but for the rest of you it is just plain old Ted.

Ever since I was a little kid, I always loved money and being an entrepreneur. In fact, I still have cassette tapes of me talking to my grandmother at the age of five and my mother tells me all the time how much I played with money as a kid...

Read More About Ted Here

Ted Jenkin is a frequent guest columnist for the Wall Street Journal and Headline News Weekend Express. He is the co-CEO of oXYGen Financial. You can follow him on LinkedIn @ www.linkedin.com/in/theceoadvisor or on Twitter @tedjenkin.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. oXYGen Financial is not affiliated with Kestra IS or Kestra AS. Kestra IS and Kestra AS do not provide tax or legal advice.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor regarding your individual situation. 

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  • Avatar
    June 21, 2012

    my father is now retired from military and getting old, but the pension are better for his life and health.

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