Are non-COLA pensions and annuities (SPIAs) the same?

[Finally FI]

I've noticed that quite a few ER members have non-COLA pensions, but at the same time the general sentiment is negative about SPIAs.

They appear to be the same thing to me. Are they different somehow?

When I retired last year, I chose a lump sum payout of a pension I had because the company's annuitized options were lower than what I could get elsewhere later due to interest rates increasing. My pension cash values are about 20% of our portfolio, and annuitizing them would cover the majority of our yearly expenses in today's dollars, not including healthcare.

When I run spreadsheets and simulators like i-ORP, they all skew to significantly higher (real, before inflation) income later in life because of current ACA subsidy AGI limits and future Social Security income, so the inflation-related reduction of SPIA payments over time doesn't seem like it would matter with the majority of our portfolio remaining in low-cost index funds.

I figured I'd ask because as with many topics, things are not always what they seem and the many smart people here can explain why.

 

[finnski1]

No. I don't think they are different however I think the people (including me) who aren't real thrilled with annuities are more talking about whether they would buy one in general not when comparing to a pension.
The pension(though earned) is a benefit and given to you so whether you take the lump sum or annuity could be argued wither way. Those of us with out a pension are constantly analyzing if it makes sense period, not either or IMHO.

 

[Slim11]

I think it depends. I have a pension with no colas. I can not take a lump sum. Nor do I want to. Everything depends on the plan you have, and not all are the same.

 

[Jerry1]

I had a choice between my pension and a lump sum. I took the pension (non-cola). Mainly for diversification. With my pension and SS, I can live pretty well. My portfolio is essentially there to cover inflation.

The pension is not really any different than an annuity, however, when I was deciding on the pension or lump sum, I priced out some annuities and the pension I was getting was much better than I could get in an annuity on the open market. Plus, it’s a pension and therefore covered by the Pension Benefit Guaranty Corporation (PBGC). Not a big deal, but some additional protection from default. Also, my company fully funds the pension. I feel pretty comfortable with its security.

 

[Midpack]

I've noticed that quite a few ER members have non-COLA pensions, but at the same time the general sentiment is negative about SPIAs.

They appear to be the same thing to me. Are they different somehow?

While they payout in a similar fashion, it's the upfront cost of annuities that keep many of us away. You are paying a premium for that income stream, just look at quotes and you will see the cost of annuities can vary considerably.

You don't know what a pension "cost" you during your career, it was built into your compensation, so there is no way to compare the value with an annuity.

However, some of us were offered a lump sum alternative, which does allow a direct comparison. I know many here found the lump sum to be less than the cost of a comparable annuity, so they took the pension - but I don't know if that's common. I was offered a lump sum (which I took), and it was almost exactly the same $ as a SPIA on the open market. In my case I know MegaCorp was just buying an annuity on behalf of the employee, so it really wasn't a paygo pension anyway.

 

[Finally FI]

No. I don't think they are different however I think the people (including me) who aren't real thrilled with annuities are more talking about whether they would buy one in general not when comparing to a pension.
The pension(though earned) is a benefit and given to you so whether you take the lump sum or annuity could be argued wither way. Those of us with out a pension are constantly analyzing if it makes sense period, not either or IMHO.

That makes sense. It seems like the same arguments could be made to take the lump sum (if available) as those to not buy an SPIA.

I think it depends. I have a pension with no colas. I can not take a lump sum. Nor do I want to. Everything depends on the plan you have, and not all are the same.

Interesting. I didn't realize some companies do not offer a lump sum alternative.

I had a choice between my pension and a lump sum. I took the pension (non-cola). Mainly for diversification. With my pension and SS, I can live pretty well. My portfolio is essentially there to cover inflation.

That has been my thinking as well, although SS is still 4 to 12 years out, depending on when I take it.

The pension is not really any different than an annuity, however, when I was deciding on the pension or lump sum, I priced out some annuities and the pension I was getting was much better than I could get in an annuity on the open market. Plus, it’s a pension and therefore covered by the Pension Benefit Guaranty Corporation (PBGC). Not a big deal, but some additional protection from default. Also, my company fully funds the pension. I feel pretty comfortable with its security.

Interesting that the pension was higher than the annuitized lump sum for your company. When I compared them for my company last year they were almost identical, and the SPIA rates today are significantly higher for the same investment.

While they payout in a similar fashion, it's the upfront cost of annuities that keep many of us away. You are paying a premium for that income stream, just look at quotes and you will see the cost of annuities can vary considerably.

You don't know what a pension "cost" you during your career, it was built into your compensation, so there is no way to compare the value with an annuity.

However, some of us were offered a lump sum alternative, which does allow a direct comparison. I know many here found the lump sum to be less than the cost of a comparable annuity, so they took the pension - but I don't know if that's common. I was offered a lump sum (which I took), and it was almost exactly the same $ as a SPIA on the open market. In my case I know MegaCorp was just buying an annuity on behalf of the employee, so it really wasn't a paygo pension anyway.

The shared information and thought processes behind the negative sentiment around SPIAs are good IMO to push people like me to evaluate alternatives.

I just looked at 10-year MYGAs and they're at 5.45%, with return of (inflation devalued) original capital at the end. SPIAs are around 6.4% payout, original capital gone. Both would provide me diversification. Food for thought (for me).

 

[OldShooter]

When DW retired we had the option of a lump sum and we took it, believing that we could invest for better results than the pension represented. At that time (over 15 years ago) I was not very sophisticated in thinking about annuities. If I had the benefit of what I've read here over the years I certainly would have done a better analysis though I don't know whether that would have changed the decision.

 

[latexman]

Interesting. I didn't realize some companies do not offer a lump sum alternative.

My pension was annuity only. That's quite common.

 

[MarieIG]

DH received a pension and an annuity. He had the option to take a lump sum for the annuity - but not the pension. He is receiving monthly payments from both.

 

[badatmath]

I think it depends. I have a pension with no colas. I can not take a lump sum. Nor do I want to. Everything depends on the plan you have, and not all are the same.

+1 No choice to take lump

 

[jollystomper]

The pension is not really any different than an annuity, however, when I was deciding on the pension or lump sum, I priced out some annuities and the pension I was getting was much better than I could get in an annuity on the open market. Plus, it’s a pension and therefore covered by the Pension Benefit Guaranty Corporation (PBGC). Not a big deal, but some additional protection from default. Also, my company fully funds the pension. I feel pretty comfortable with its security.

+1 - same situation here.

 

[brett]

^ditto.

Plus, it was part of an overall financial plan that included DB, SS, investment income, etc.

 

[skyking1]

I think it depends. I have a pension with no colas. I can not take a lump sum. Nor do I want to. Everything depends on the plan you have, and not all are the same.

Same boat here. Mine is a union pension with no COLA.
I can make it a COLA, by lopping off a bunch of the initial payments that they then give back at a later date. That seems like a fool's bet on longevity.

 

[jollystomper]

^ditto.

Plus, it was part of an overall financial plan that included DB, SS, investment income, etc.

Agree - I wanted to have 3 main income streams - Pension, investments, SS - so that without any one of them we could still have a good retirement.

 

[kyzymurgist]

I had the option of a partial lump sum. My original employer had a great retirement plan with pension as early as age 49 - heavily subsidized. And I had every intention to take advantage of that. They also included a lump sum option.

But we were purchased by another company with less generous benefits and no lump sum option. This sale essentially created two separate pensions with different benefits calculated from years of service and final salary. And the huge subsidy at age 49 went away darnit.

For me it was an easy decision to take the early years pension as a lump sum since it brought my annual annuity down below the PBGC maximum coverage limit. And my company was somewhat unhealthy with an underfunded pension fund.

In retrospect, the lump sum was an excellent decision 10 years ago. But things could have gone differently.

 

[Texas Proud]

As others have said the decision has to be made at the time...


I have seen where the pension is high but a lump sum is really low... IOW, if you took a lump sum and tried to buy a SPIA you would not get close to the payment.


Like you have said, there are some where the lump sum could buy a better SPIA than offered...


But to your main question, there is no difference with an SPIA and a pension if both are started at the same time... it is just a monthly income stream...


The only thing that I would look at is what happens if the entity goes bust.. IOW, who will keep paying IF something goes wrong..

 

[VanWinkle]

tI had a choice between my pension and a lump sum. I took the pension (non-cola). Mainly for diversification. With my pension and SS, I can live pretty well. My portfolio is essentially there to cover inflaion.

The pension is not really any different than an annuity, however, when I was deciding on the pension or lump sum, I priced out some annuities and the pension I was getting was much better than I could get in an annuity on the open market. Plus, it’s a pension and therefore covered by the Pension Benefit Guaranty Corporation (PBGC). Not a big deal, but some additional protection from default. Also, my company fully funds the pension. I feel pretty comfortable with its security.

"I had a choice between my pension and a lump sum. I took the pension (non-cola). Mainly for diversification. With my pension and SS, I can live pretty well. My portfolio is essentially there to cover inflation."

Same here Jerry1, diversification can reduce worry and retirement is supposed to be about not worrying.

VW

 

[jazz4cash]

Haven’t actually seen much objection to a plain vanilla SPIA or MYGA. The complicated variable and/or index linked annuities that are pushed by annuity sales reps are the ones that are despised, but annuities are frequently all lumped together.

When I retired I could’ve taken a lump sum and purchased an equivalent single life annuity but megacorp subsidized the survivor option. It cost 5% of the single life payment for 70% survivor benefit which I could not match on the outside. You really have to assess case by case.

 

[Koolau]

I've noticed that quite a few ER members have non-COLA pensions, but at the same time the general sentiment is negative about SPIAs.

They appear to be the same thing to me. Are they different somehow?

When I retired last year, I chose a lump sum payout of a pension I had because the company's annuitized options were lower than what I could get elsewhere later due to interest rates increasing. My pension cash values are about 20% of our portfolio, and annuitizing them would cover the majority of our yearly expenses in today's dollars, not including healthcare.

When I run spreadsheets and simulators like i-ORP, they all skew to significantly higher (real, before inflation) income later in life because of current ACA subsidy AGI limits and future Social Security income, so the inflation-related reduction of SPIA payments over time doesn't seem like it would matter with the majority of our portfolio remaining in low-cost index funds.

I figured I'd ask because as with many topics, things are not always what they seem and the many smart people here can explain why.

You mentioned ACA limits, which, to me, would favor waiting to buy an annuity (so you would't be getting money now - possibly messing with your ACA eligibility.) YES, do all the calculations regarding such things as IRMAA limits for Medicare. Very important and a lot of things can't be undone later. When you have, say 401(k) RMDs plus money from SS and SPIA (or pension) it can all add up and put you into the next MC bracket. Lots to think about and plan for at this stage.

Have you also considered a delayed annuity? Buy now, start collecting after ACA isn't a big issue because you're on MC. Options, options, options. I think there may be modeling for such decisions, but not sure - maybe IOrp. Anyway, IF you have a good chunk of change going into Early Retirement, it pays to calculate all the potential tax and program limits and gotchas. Great 1st World problems to have though YMMV.

 

[Finally FI]

Thank you for all of the replies!!

Agree - I wanted to have 3 main income streams - Pension, investments, SS - so that without any one of them we could still have a good retirement.

That's been my thinking, also, (diversification via multiple income streams mentioned by @Jerry1 and many other folks here) and some of the reason for my questions.

You mentioned ACA limits, which, to me, would favor waiting to buy an annuity (so you would't be getting money now - possibly messing with your ACA eligibility.) YES, do all the calculations regarding such things as IRMAA limits for Medicare. Very important and a lot of things can't be undone later. When you have, say 401(k) RMDs plus money from SS and SPIA (or pension) it can all add up and put you into the next MC bracket. Lots to think about and plan for at this stage.

Have you also considered a delayed annuity? Buy now, start collecting after ACA isn't a big issue because you're on MC. Options, options, options. I think there may be modeling for such decisions, but not sure - maybe IOrp. Anyway, IF you have a good chunk of change going into Early Retirement, it pays to calculate all the potential tax and program limits and gotchas. Great 1st World problems to have though YMMV.

DW is 52, so we have quite a few years of health insurance to figure out, and (probably) even more years until her SS kicks in.

In 15 years, once we're both on Medicare and getting SS, it will change from SORR to a tax optimization puzzle, which I agree is a 1st world problem!

I've run models in i-ORP and the sticking point is the AGI level and ACA.

My primary concern at this stage is SORR if we experience an extended market downturn. And a secondary concern is not doing things we'd like to because we're paranoid, and then having piles of money when we're too old to enjoy it.

 

[Finally FI]

The only thing that I would look at is what happens if the entity goes bust.. IOW, who will keep paying IF something goes wrong..

Are SPIAs backed by the government in any way, similar to FGIC or PBGC?

 

[Koolau]

Are SPIAs backed by the government in any way, similar to FGIC or PBGC?

Don't quote me, but I'm thinking SPIAs are insurance products. So, they would probably be backed by the same pool organization that backs insurance companies in case of bankruptcies. I don't think that's quite as good as PBGC, and certainly not as good as gummint backing. BUT you don't hear about any big deal insurance company bankruptcies, so I'm thinking they're pretty safe.

You can look up the rating of the insurance company if you're concerned. I hope someone can add to this since YMMV.

 

[MarieIG]

There are State guarantees on SPIAs - within limits.

A search for "state annuity guarantee limits" may bear fruit.

 

[bada bing]

Between 2000-2020 there were lots of companies shedding their pension plans. At least in the Oil business where I worked. I vested in 4 different pension plans over my career. They all had unique terms. 3 of the 4 were defined benefit plans and of those I took lump sum offers from 2. The remaining one kicks in the end of this year at age 65, paying $330/month with no other options offered.

The 4th pension started as a defined benefit, but was converted to a cash balance plan in 2007. I can take the lump sum from that one at any time, but the deferral rates are pretty good - the higher of 5% or 30 year treasury rates. I have the option to annuitize or lump sum until age 71. The annuity rates offered are 10%-15% better than I can find on the open market. I most likely will take that annuity at age 71. My reasons have more to do with protecting my aging self from bad decisions than thinking it's a great investment.

So at least in my case there isn't an anti-annuity bias.

 

[MarieIG]

Between 2000-2020 there were lots of companies shedding their pension plans. At least in the Oil business where I worked. I vested in 4 different pension plans over my career. They all had unique terms. 3 of the 4 were defined benefit plans and of those I took lump sum offers from 2. The remaining one kicks in the end of this year at age 65, paying $330/month with no other options offered.

The 4th pension started as a defined benefit, but was converted to a cash balance plan in 2007. I can take the lump sum from that one at any time, but the deferral rates are pretty good - the higher of 5% or 30 year treasury rates. I have the option to annuitize or lump sum until age 71. The annuity rates offered are 10%-15% better than I can find on the open market. I most likely will take that annuity at age 71. My reasons have more to do with protecting my aging self from bad decisions than thinking it's a great investment.

So at least in my case there isn't an anti-annuity bias.

I don't think this rationale gets enough attention. People who may be great at handling investments at 50 may/ or may not - be able to do so at 80. It is one reason that I prefer to have some fixed (relatively reliable/ automatic) income in the mix.