Annuity or lump sum?

[jerryo]

My DW worked at an international financial institution overseas for a number of years. In addition to her pension, she was eligible to put a portion of her salary aside as "supplemental retirement savings." Up to age 60, these funds earn a guaranteed 8% a year. When she turns 60, she has the option of taking these funds as a lump sum or as an "annuity." (She could also leave as savings, but only earning 3%/year, which seems less desirable).

The lump sum would be about $500,000

The annuity would begin at around $40,000 a year, but would be fully indexed for inflation with a guaranteed minimum increase of 3%/year even if there is no inflation. While there would be no specific survivors benefit, there would also be a guaranteed minimum 10 year payout (to me, if my wife (who's about 10 year younger) predeceased me).

Sounds like a no-brainer (the annuity must be subsidized by the institution), but perhaps I'm missing something. Anyone have any thoughts?

 

[Midpack]

Unless I'm missing something, the lump sum isn't even close to comparable, even without the COLA. You did say beginning at her 60 and it's a lifetime annuity for her, 10 year minimum for you only. If so, congrats!

 

[jerryo]

Right. Life annuity for her with a minimum 10 year payout to beneficiaries if she predeceases. Seems like a very good deal!

 

[2017ish]

Wow. Agree with midpack, that's a very nice supplemental pension/annuity. (Assuming, of course, that her employer isn't "Enron global savings and Loan.")

 

[exnavynuke]

Yep, seems like a no-brainer to take the annuity based on the information provided.

 

[David3]

Agreed as well on the annuity. This seems like a particularly nice one. Even if it were a close call, an under-recognized issue with taking lump sums is that it will typically increase portfolio risk as the funds will likely have to then be invested in asset classes that are strongly correlated to assets you already hold.

 

[jerryo]

There might be some limited institutional risk, but it's a big international organization (think OPEC or World Bank), so that's likely less than the risk of bankruptcy with a private US based insurance company. Also, I don't think that the organization is subject to U.S. law, but there is a legal framework for redress if future issues emerge. And we do have other substantial U.S. based pensions and retirement accounts.

 

[Alex The Great]

This is definitely a very nice source of retirement income. However, I would also consider a currency exchange rate here. Since it is international organization, apparently it depends on certain foreign funds? In a short term, we will likely see a strong dollar with respect to other currencies. But for a longer term, it is likely that dollar may sharply lose its value due to various reasons. Other than that, I do not see any significant risk involved.

 

[jerryo]

It's paid in U.S. dollars, with an option in other major currencies based on some kind of rolling average exchange rate (haven't looked into this, since we're resident in U.S. and being paid in dollars avoids exchange rate risk).

 

[nun]

You'd have to get 9% annual return on $500k to support the same level of income as from the annuity from age 60 to 85. So take the annuity. It also avoids any potential US tax complications with taking the lump sum.

 

[joeea]

Sounds like a no-brainer (the annuity must be subsidized by the institution), but perhaps I'm missing something. Anyone have any thoughts?

This is in addition to her pension?

Assuming you don't need the lump sum immediately, and assuming she is in good health at 60, and assuming stability of the institution, it does indeed sound like a no-brainer to accept the inflation-indexed annuity.

How much longer until she needs to make her decision? (Obviously financial and world conditions can change that might impact the decision.)

 

[jerryo]

Yes, in addition to a fully indexed pension (with a minimum 3% increase) equal to about 50% of her final salary. Need to decide what to do with the "supplemental retirement savings" within the next 6-12 months.

 

[racy]

To me, it sounds too good to be true so ...(fill in the rest of the sentence). Personally, I'd take a bird in hand (the lump).

 

[joeea]

Yes, in addition to a fully indexed pension (with a minimum 3% increase) equal to about 50% of her final salary. Need to decide what to do with the "supplemental retirement savings" within the next 6-12 months.

An inflation-indexed pension, plus an inflation-indexed annuity? She's a lucky woman.

You should look at your needs post-60. There might be a need for a lump sum (to purchase a 2nd home, for example). You might also wish to look at your post-60 income tax situation and your overall income needs. It's possible (if unlikely) that you don't need the 40k/year and that it would put you in a higher tax bracket, thus making a guaranteed 3% return savings account appealing.

But assuming you don't have a lump-sum need, and won't be too adversely affected by an income tax hit, it certainly sounds like a no-brainer to take the annuity.

 

[Happyras]

My Mega corp has a supplemental pension, VPA and PPA. When I elected to retire on the company pension, I had the option of annuity on my personal after tax contributions, or LS. I took LS and elected a rollover distribution to my Roth. I later find out the rules, which no one mentions. PUB 590-even though my contributions were after tax, my LS is fully taxable unless rolled into a tIRA. I get to pay tax again on those contributions to my ROTH or re-characterize the mistake. The corp pension is required to use a portion of the distribution of the regular pension as non-taxable over the life of the pension making the LS fully taxed. It may not apply to this foreign fund, but likely will be complicated. BTW even my accountant got this wrong, my 1099-r showed fully taxable distribution with a box 7 code G and she took that as non-taxable due to the coded box.

 

[nun]

An inflation-indexed pension, plus an inflation-indexed annuity? She's a lucky woman.

You should look at your needs post-60. There might be a need for a lump sum (to purchase a 2nd home, for example). You might also wish to look at your post-60 income tax situation and your overall income needs. It's possible (if unlikely) that you don't need the 40k/year and that it would put you in a higher tax bracket, thus making a guaranteed 3% return savings account appealing.

But assuming you don't have a lump-sum need, and won't be too adversely affected by an income tax hit, it certainly sounds like a no-brainer to take the annuity.

Tax is important with international pensions. I wonder if the OP has a US tax free basis and how they have been dealing with US tax on the employer contributions and gains.