Pension Plans (Lump Sum or Annuity)?

[Marauder]

Hi,

I signed up for the forum a few years ago but only recently started reading through the topics. My wife and I are within a year of retiring. My company offers either an annuity payout for our company’s pension plan or a lump sum distribution.

For those who have needed to make this decision, could you tell me your thought process? I have read a lot about pension protection under the 2006 federal law, but also know that a pension plan can be significantly altered by my company if they so desired (ex. lowering the payout) or potentially being eliminated if the company has been acquired. My company is a Fortune 500 company. Thoughts?

[ziggy29]

Welcome to the forum, or welcome to participation.

You are asking good questions. One thing you can do is price out a single premium annuity (SPIA) to see how much it could cost to buy an income stream similar to what your pension would provide. Then you can see if the lump sum offer is more or less -- if it's a lot less, I likely wouldn't take the lump sum. If it is more, it would be tempting to take the lump sum and roll it into an IRA.

A company can change the formula for active employees or terminate the pension plan, but only on future service -- you'd still get what has already vested for you, what you have already earned. They can't take that away from you.

If the pension is small enough to be fully covered by PBGC, a company's financial default is less of a concern.

My first Megacorp offered me a pension buyout a few years ago. I'm vested in almost 12 years of service so I have a small pension waiting for me. The offer wasn't great, and I turned it down. Partially because the offer wasn't all that strong, and also partially because I wanted to preserve a "three legged stool" retirement, even if the "pension leg" of the stool is a short one (only about $650 a month at age 65 with 100% survivorship).

[albireo13]

I've been going through the same thing, being 1 year away from retirement.
One thing to consider, if you have children or possible heirs, is that an annuity will cease totally when you and your spouse pass away.
With a lump sum, the amount becomes part of your assets and you could leave anything leftover to your heirs.

[imoldernu]

I posted a warning on annuities on a recent thread.. This may be a good time to renew a caution on the subject.
We have an annuity from Brighthouse/Metlife that has caused a serious problem, in that they have stalled and refused to pay out our legitimate claim (monthly income stream). After about 20 hone calls and numerous letters, there has been no action at all for four months, and we are hopefully awaiting action from the Attorney Generals of Illinois and South Carolina that we have contacted.

In looking for comments that might mirror mine, I came across this legal judgement (link below) against the company for fraud.

For older persons who had forgotten about annuities from long ago, or had passed away, the company did no research on where the monies should have gone... but... closed the accounts and kept the monies that were due. Between 13,000 and 30,000 customers were affected. A slap on the wrist for the company with a $1,000,000 fine, and a transfer of $500,000,000 to an account for future claims.

https://www.bna.com/metlife-brightho...-n73014476623/

Despite this, the company retains an "A" rating.

Based on our experience, I would never again trust this company, and would only go in to this kind of supposed future security with great caution. Caveat Emptor.

[KCGeezer]

Quote:

Originally Posted by albireo13 With a lump sum, the amount becomes part of your assets and you could leave anything leftover to your heirs.

What he said.

[Jerry1]

I decided to take the pension instead of the lump sum. My considerations were that the plan was FULLY FUNDED and I expect that it will be in the future (of course no guarantee of that). The plan is insured by the PBGC. Finally, the plan spins off what would be about 5% of the lump sum. Basically, it is worth about $30K per year. I couldn't get the lump sum to generate that amount of return, so conceptually, the lump sum would dwindle over time. With a budget greater than $30K, I needed to get $30K from somewhere and this seemed like a reasonably secure way to get it. Which brings me to the last consideration - spreading risk. I'll have the pension, my SS and my investments (401K, IRA, after tax savings). I felt it was prudent to have three sources of income versus two. Hopefully, if any go bust, not all three will. When I start taking SS, along with my pension, my withdrawal from my investments will be just over 1%. All considered, I'm comfortable with my plan. As many have said, you'll not know if you made the right decision until you die, so I think I've done the best with the information I have at this time.

[VanWinkle]

I also took the annuity as it was much better than I could buy with the lump sum. I wanted my wife protected without her having to worry about investing.

My Social Security and the pension will cover her expenses. It has a partial COLA (50%) and is 134% funded almost every year.

The idea of leaving more to heirs is not my concern when making sure DW
is covered.

Everyone has to decide for themselves which way makes sense.

[Jerry1]

Quote:

Originally Posted by VanWinkle I also took the annuity as it was much better than I could buy with the lump sum. I wanted my wife protected without her having to worry about investing. My Social Security and the pension will cover her expenses. It has a partial COLA (50%) and is 134% funded almost every year. The idea of leaving more to heirs is not my concern when making sure DW is covered. Everyone has to decide for themselves which way makes sense.

Good point. I forgot to mention that we chose the 100% survivor option. So whoever dies first, the person living will get the same amount. The difference between that and the lesser benefits for the survivor just didn't make sense financially. Heck, if one of us dies tomorrow, it's not like the expenses are going to go down drastically. Plus, why shouldn't DW live well after I'm gone. She put up with me. She deserves it.

[Dtail]

Will take the 54k lump sum pension at 65 y.o. Never know if the pension funding will last a lifetime.

[CRLLS]

Our retirement plan goes out to age 100. My company pension did not include a COLA. When faced with the same decision, 35 years on a "fixed" pension was not in our best interest. We would only consider 100% survivor from the pension. We then looked at the cash and used the 4% rule with COLA increasing every year. IIRC the breakeven in monthly income was somewhere in the mid to late 70's. Anything after that, we would have more to spend. It would help cover assisted living expenses if needed, or cover higher taxes should one of us pass earlier. Not to mention if we both died in a car accident 2 years in, there would be something (more) to pass on to our heirs. There were other considerations about the PBGC allowing reduced payments as opposed to having the pensions being taken over and paying out 100% of the promised amounts. Not very guaranteed IMO. I'd rather be responsible for my destiny.

To take the pension or take the cash is a personal decision as are so many other retirement decisions.

[ckelly78z]

I will have to check with HR for sure, but I don't believe my 401K has a cash payout option. I will be vested for 30 years. The full survivorship amount will be in the $1500 a month range, and it is from a global top 100 company, so not really worried about funding.
I could most likely invest a lump sum better than the company could, but the "lump" would have to be pretty sizeable for me to consider it.

[BeachOrCity]

Quote:

Originally Posted by ziggy29 Welcome to the forum, or welcome to participation. You are asking good questions. One thing you can do is price out a single premium annuity (SPIA) to see how much it could cost to buy an income stream similar to what your pension would provide. Then you can see if the lump sum offer is more or less -- if it's a lot less, I likely wouldn't take the lump sum. If it is more, it would be tempting to take the lump sum and roll it into an IRA. A company can change the formula for active employees or terminate the pension plan, but only on future service -- you'd still get what has already vested for you, what you have already earned. They can't take that away from you. If the pension is small enough to be fully covered by PBGC, a company's financial default is less of a concern. My first Megacorp offered me a pension buyout a few years ago. I'm vested in almost 12 years of service so I have a small pension waiting for me. The offer wasn't great, and I turned it down. Partially because the offer wasn't all that strong, and also partially because I wanted to preserve a "three legged stool" retirement, even if the "pension leg" of the stool is a short one (only about $650 a month at age 65 with 100% survivorship).

Above is sound advice.

Whatever you do don’t compare a pension payout percentage of lump sum to what equities could potentially earn. That argument is used by many but it is fundamentally flawed in that it ignores the huge difference in relative risk of the options.

If when you compare the pension to what you could buy yourself with the lump sum and it (pension) does not seem very good you can also compare lump sum to a ladder of zero coupon bonds yielding your pension lasting for your longevity. If the cost is less than the lump sum you can see what the remainder will buy in terms of a deferred annuity when your ladder terminated. (Kind of a build your own pension). My guess is you won’t be able to build it yourself for the lump sum amount. Lot of leg work with this option but going thru this exercise will help you understand the value of the pension financially.

[DogGone]

I am I. My early 50s and just chose to take the lump sum and roll it into an IRA. For me, the break even point was if my balanced portfolio could make 4% or more over the next 30 years which I believe it will. Also, This amount did not make or break us so I’d rather just have control and less accounts for simplicity.

[Which Roger]

Quote:

Originally Posted by DogGone I am I. My early 50s and just chose to take the lump sum and roll it into an IRA. For me, the break even point was if my balanced portfolio could make 4% or more over the next 30 years which I believe it will. Also, This amount did not make or break us so I’d rather just have control and less accounts for simplicity.

I also ERd in my early 50s. I chose the annuity, in large part because it would provide me an income stream until I turn 59 1/2 and can tap into the retirement accounts. Most of my assets are tax-deferred. If I had large balances in taxable accounts, I might have chosen differently, but probably not.


Everybody's situation is different, and just like the "when to take SS" discussions, there is no one-size-fits-most answer. In this thread, we've already seen age-at-time-of-ER considerations, survivor benefit considerations, and wanting (or not) to leave money to heirs as factors that go into making the decision. Taxes and managing income are another big factor. For example, an annuity is income that may affect one's eligibility for ACA subsidies.

[pacergal]

Agree that every situation is different. OP I would really take the time to investigate.
WhenI was making the decision, many people sent me to an annuities calculator. DH and I choose monthly payout, with 100 % survivor, as it was more than we would get with an annuity. It is a public pension, pretty well funded, with small <2% COLA.

[flintnational]

Welcome to the forum. As others have suggested, my first step would be to determine if the lump sum and annuity are actuarially equal. In recent years some companies have added a lump sum offer. The lump sum offer is made at a discounted payout vs the annuity thereby reducing the companies costs.

Next I would factor in my personal situation, health, investment goals and the structure of other assets. In my case, my retirement was fully funded by non-pension but riskier assets (stocks and bonds). So, the annuity option provided diversification. Even then I was only about 60/40 in favor of the annuity.

[brett]

I went with the pension vs the commuted value. Our company pension funding was high, often in excess of 100 percent on both a wind up and an ongoing basis. One I retired my understanding is that the company essentially bought an annuity at a bank in order to get risk off their balance sheet. No issue. Plus, the monthly pension entitlement was very good vis a vis then current annuity rates. My spouse was only 2 years younger hence the joint amount did not penalize me to any great extent.

Why I went with the pension

-my view was that the company pension was one leg of three legs of a retirement income stool.

-I wanted to have an guaranteed income that met much of our projected expenses. We wanted to be free to spend our investment without worrying about 'if the market takes a dive' or have an issue if things went very bad in the short term.

-if I had taken the commuted value $250K of it would have been immediately taxable in my hands (based on my tax jurisdiction). My incremental tax rate was 39 percent. I was already taking into income the commuted value of an additional supplementary pension from the same company that represented about 1/3 of my total pension entitlment.

-I was, and am, in excellent health. There is longevity in my family. No smoking, weight is at the right level, and we eat healthy

-looking in the rear view mirror eight years ago it was the right decision for us. Might not be for others.

[pb4uski]

Quote:

Originally Posted by imoldernu I posted a warning on annuities on a recent thread.. This may be a good time to renew a caution on the subject. We have an annuity from Brighthouse/Metlife that has caused a serious problem, in that they have stalled and refused to pay out our legitimate claim (monthly income stream). After about 20 hone calls and numerous letters, there has been no action at all for four months, and we are hopefully awaiting action from the Attorney Generals of Illinois and South Carolina that we have contacted. In looking for comments that might mirror mine, I came across this legal judgement (link below) against the company for fraud. For older persons who had forgotten about annuities from long ago, or had passed away, the company did no research on where the monies should have gone... but... closed the accounts and kept the monies that were due. Between 13,000 and 30,000 customers were affected. A slap on the wrist for the company with a $1,000,000 fine, and a transfer of $500,000,000 to an account for future claims. https://www.bna.com/metlife-brightho...-n73014476623/ Despite this, the company retains an "A" rating. Based on our experience, I would never again trust this company, and would only go in to this kind of supposed future security with great caution. Caveat Emptor.

You should be talking with the Insurance Commissioner for your state rather than the AG. The Insurance Commissioner is better positioned to press the for an answer and resolution. IME Commissioners do a pretty good job acting as an intermediary between the company and its citizens. The Commissioner would have the power to threaten to kill their authority to sell in Illinois if they didn't like the answer that the company was providing.

Having worked with MetLife (but albeit before the Brighthouse spinoff), I am surprised that they would be resisting a valid claim, so I suspect that there may be a bit more to this story. Have they stated why they won't start annuity payments?

The company has taken a hit for not chasing down annuitants dilligently and from what has been reported in the press and their own disclosures have released reserves prematurely... the money is still there (assuming that it hasn't been distributed as dividends to the holding company)... it is just in surplus rather than in reserves.

[CRLLS]

I had one heck of a time getting my MetLife WL insurance policy annuitized. I got all kinds of answers saying I was wrong. Had to talk to many people before I got to someone who knew how to accomplish what the contract guaranteed. The I got a letter about taxation that was wrong. That too, took a series of calls to straighten out. I don't understand how such a well respected company could have morphed into such a pile of misinformation and utter chaos. Fortunately, my persistence prevailed in the end.

If you are sure of your position, settle for nothing but what is due to you.

On another thought, I found unclaimed funds in my deceased DF's name. ML's last known address was from about 40 years prior. I think it was money from when ML went public. It was eventually turned over to his state of residence. Once our claim was verified, it was released from the state and distributed to his children.

[pb4uski]

I think what can easily happen is that the people that you are talking with today don't have a lot of knowledge of the policy terms of a WL policy issued 30 or 40 years ago... and the systems are old and don't talk to each other well and in many cases don't capture a lot of subtle nuances of policy terms.

Not a good excuse, but probably what is happening.