Pensions - lump sum vs. payments

[lgriffa]

Is there any preference out there of you pension beneficiaries in taking a lump sum distribution as opposed to ongoing payments?

[dm]

I would think that it would depend on the plan. With my wifes plan it definatly makes more sense to take the ongoing payments. At least in our situation. There were various options, with and without survivor benefits, and also guaranteed payout.

Her lump sum was something like 350k, her pension is 60k with 75% to me for survivor benefits. She is 48 and I am 52, so we figure the odds are with us.

[bbbamI]

It depends on how solid you think the company is and also if you are willing to invest/handle the money yourself. In our situation, we had the option of taking a partial lump sum and a smaller annuity. We chose that option. A bird in the hand....

[kaneohe]

I would think that if you are of "average health", the actuarial tables used by the company should result in there being a wash as far as choices are concerned.
Then it might depend on what other assured sources of monthly income you have.......
other pensions, annuities, social security, etc. vs lump sums. Personally, I would find it very comforting to have social security and small pensions to cover the basic
costs of living so that even in a market downturn like we have had, you don't have to
worry about where that income is coming from. I would find it a bit scary to be trying to get that income from a shrunken lump sum even if you had cash "buckets"
designed for X yrs. because the bad time might last X+ N yrs.

[Spanky]

Perform a NPV (net present value) analysis to determine which is a better option. As others have mentioned, it also depends on the stability or ability to pay of the provider (or payer).

[Independent]

IMO, the "lump sum or monthly check?" question has the same inputs as the "should I buy a private annuity?" You consider your health, your preferences for "controlling the money", concerns about major expenses, and concerns about the stability of the monthly income provider.

That said, I've got two additional thoughts:
1) Sometimes the lump sum and monthly income are not actuarially equivalent. My pension was dramatically biased in favor of the monthly income. My sister had a similar situation.
2) Always consider Social Security. i.e. you might take the lump sum, then use the money to defer SS. Because SS "annuity prices" are pretty good, that may gain you a little income.

[ziggy29]

Quote:

Originally Posted by Independent IMO, the "lump sum or monthly check?" question has the same inputs as the "should I buy a private annuity?" You consider your health, your preferences for "controlling the money", concerns about major expenses, and concerns about the stability of the monthly income provider.

To the stability part, I'd also add you need to know what "protections" there are in case of default, too. With a lump sum pension, below a certain level PBGC may cover 100% of the payouts for the rest of your life, whereas with an annuity, failure of an issuer provides limited recourse (in Texas, for example, an annuity would be protected up to $100K of cash value, I believe, so any annuity below that value is "safer" than one that exceeds it).

[JOHNNIE36]

ziggy's point is very important. I'm not an expert in this field but my pension with GM is considered a "defined benefit plan". That term is important in that is has to be "defined" in order to be guaranteed by the government (Pension Benefit Guarantee Trust) and then there are caveats as per ziggy. There is a government website on this subject. Whether or not your company is "stable", the type of pension you have would indicate if you should take a lump sum. Don't forget the tax implications.

[Moemg]

Some pensions are tied to health benefits so if you opt for the lump sum you lose the health benefits .

[Midpack]

Quote:

Originally Posted by Independent Sometimes the lump sum and monthly income are not actuarially equivalent. My pension was dramatically biased in favor of the monthly income.

That's the first thing I'd check, you can do it online yourself. What $/mo annuity will the lump sum buy (or vice versa)? In my case, they're almost exactly the same with my former MegaCorp. If you find in your case that one is more generous than the other (usually the bias seems to be toward monthly), that would be hard to ignore. The only thing that would trump that IMO would be company stability, if that's suspect to you, I would go with the lump sum for sure. Best of luck...

[harley]

If the stock market is getting ready to rise significantly, you should take the lump sum and invest it yourself. On the other hand, if the market is going to drop significantly or be in the doldrums for the foreseeable future, the annuity option might be a better choice. Glad to have been able to help.

[lgriffa]

Thanks for the insight. It seems to me that the periodic payments will increase over time with inflation and cost of living, that isn;t accounted for in the lump-sum payment. Am I missing something here?

[mickeyd]

Giving away a guaranteed lifetime income is difficult. I considered it with one of my pensions a few years ago, but after doing some research I decided to stay with the income. Now that the market has tanked, I feel good about my decision and will appreciate receiving that monthly check starting in November.

It all boils down to one thing or another~Do you want the security that an income stream brings or do you want to take your chances.

[ziggy29]

Quote:

Originally Posted by mickeyd Giving away a guaranteed lifetime income is difficult. I considered it with one of my pensions a few years ago, but after doing some research I decided to stay with the income. Now that the market has tanked, I feel good about my decision and will appreciate receiving that monthly check starting in November.

Personally I like the three legged stool concept of retirement. If I already had a fairly decent balance of personal retirement savings, I probably wouldn't be too inclined to take the lump sum instead of the pension unless the math made it a no-brainer (not likely) or the company and its pension plan were on very thin ice.

[Katsmeow]

Quote:

Do you want the security that an income stream brings or do you want to take your chances.

But some might put it this way:

Do you want the security that cash in hand brings or do you want to your chances that the income stream will be there for the next 20, 30, 40 years?

Yes I know that most pensions are guaranteed but there is a limit and survivor benefits may be more limited than provided in your plan. And, what if there are a lot of pension failures and the guaranty is cut significantly? these are the things that tend to make me favor the lump sum.

[SarahW]

This is sort of like the "should I pay off the mortgage?" debate. It's more of a personal comfort level decision.

And as for tax implications on a lump sum...that depends on what is done with the money once it's distributed.

[kcowan]

I took immediate monthly payments at age 49. It must have been the best deal because during their next downsizing (15 months later), they no longer offered it!

Collected for 17 years so far with 14 years to go. Dad lived to 95 so with any luck it could be a big payoff...included continuing medical coverage for life which was a bonus compared to the annuity calculations.

[hankster]

Quote:

Originally Posted by Moemg Some pensions are tied to health benefits so if you opt for the lump sum you lose the health benefits .

I was told that this is the case at my company. Makes the decision easy.

[runnerr]

what if the pension does not have a cost of living built-in. what you get today is the same you will get in 30 years.

[sailfish]

I just took a lump sum (about 350K) . I can't find anything better right now to compare to my monthly check I would have gotten. I bought bond funds with it from vanguard for the income, but dividends are a lot less than my annuity would have been.
I can get about the same with an insurance co. fixed annuity. I would opt for the monthy annuity from my company now. It is an oil major, so I wouldn't worry as much.
One thing I didn't realize is, that many states don't tax pensions payed out monthly, as opposed to a fixed annuity bought later. NJ doesn't tax the first $20,000. My fault for not realizing this sooner. That would keep our SS from being taxed probably.