Pension vs. Lump Sum

[rdcowan]

I 'retired' in 2009 and had the lump sum/pension option and took the pension single life annuity (which would require a 7.2% APR to last 20 years at what I'm drawing) versus the 20-year guaranteed payment (lower) and purchased a 20 year level term life policy with less than the difference. (tax free level benefit versus declining taxable total payments) I plan to live to at least 110 and "make 'em pay".... ;o)

 

[winzoid]

With slightly lower numbers than the ones you give and at similar age, DH elected to take the lump sum.

Under DH's pension he could have chosen a 100% survival option which is what he would have done. But PBGC would have only been obligated to a 50% survival option in the event of default.

Also, PBGC's maximum amount that it would pay was less than DH's pension.

Although the pension was very well-funded you just never know what will happen in 10, 20, 30 years. So he took the 7 figure lump sum which he rolled into an IRA. That was a couple of years ago and so far we aren't sorry at all for the choice.

Our reasoning was that if we wanted an annuity if he took the lump sum we could always buy an annuity. However, if he took the annuity (i.e. the pension) he couldn't trade that in for a lump sum later on. Therefore, the lump sum gave us more flexibility.

Hmm. I thought that the PBGC honored the 100% survivor if you chose that at the time the pension started.

I found I have another option: Take half the pension and the rest as a lump sum. That would put the pension well under the PBGC's maximum. That minimizes my risk and should optimize return.

Thanks all for your informative responses!!

 

[imoldernu]

Point of interest:

Today, the a court judgement was passed down to allow American Airlines to stop making lump sum payments.
Statement from PBGC Director Josh Gotbaum on the Option to End Lump-Sum Pension Payments

This changes the law, allowing companies under bankruptcy protection to eliminate lump sum payments, to protect the plan.

 

[cons]

Point of interest:

Today, the a court judgement was passed down to allow American Airlines to stop making lump sum payments.
Statement from PBGC Director Josh Gotbaum on the Option to End Lump-Sum Pension Payments

This changes the law, allowing companies under bankruptcy protection to eliminate lump sum payments, to protect the plan.

those AA pilots just got f'd in the a$$

 

[pb4uski]

Point of interest:

Today, the a court judgement was passed down to allow American Airlines to stop making lump sum payments.
Statement from PBGC Director Josh Gotbaum on the Option to End Lump-Sum Pension Payments

This changes the law, allowing companies under bankruptcy protection to eliminate lump sum payments, to protect the plan.

those AA pilots just got f'd in the a$$

I don't see the problem - they were promised a pension, not a lump sum. Many corporate pension plans don't allow lump sum distributions (including mine).

 

[CDN_47]

Not sure how it works in the U.S., but here in Canada, if you take your DB pension out as a lump sum, you end up with a portion being paid in cash to comply with the Income Tax Act Regulations. Approx 25-30% of the lump sum would then be taxed. Kind of takes all the fun out of lump sum payments in Canada ... although I'd still opt for a Lump sum over a pension. Don't trust the future Economy, or the stability in any company.

 

[Meadbh]

Not sure how it works in the U.S., but here in Canada, if you take your DB pension out as a lump sum, you end up with a portion being paid in cash to comply with the Income Tax Act Regulations. Approx 25-30% of the lump sum would then be taxed. Kind of takes all the fun out of lump sum payments in Canada ... although I'd still opt for a Lump sum over a pension. Don't trust the future Economy, or the stability in any company.

But some plans have an option to roll the lump sum into a LIRA, thereby deferring taxes. That is what I did when leaving a job in 2011.

 

[Katsmeow]

Not sure how it works in the U.S., but here in Canada, if you take your DB pension out as a lump sum, you end up with a portion being paid in cash to comply with the Income Tax Act Regulations. Approx 25-30% of the lump sum would then be taxed. Kind of takes all the fun out of lump sum payments in Canada ... although I'd still opt for a Lump sum over a pension. Don't trust the future Economy, or the stability in any company.

Typically in the US you can roll over a lump sum to an IRA where it is tax deferred. Obviously look into the specific plan.