Commutated value of define benefit plan

[freedom2022]

Hi all,

I have a defined benefit plan with the company I work for.
Some define benefit plan allow a lump sum transfer to a registered pension plan of your choice.
I read that the commutated value of define benefit plan is more when the interest rate is low. Is it true?

If so, I’d rather choose the lump sum transfer than a monthly pension.
P.S. I haven’t submitted a formal request for early retirement.
I have asked the pension plan administrator about commutated value. But they are not open to respond about it. The pension plan only explains about monthly pension income after retirement. And I heard from colleague who left company that he opted a lump sum transfer.

Thanks in advance.

 

[Dash man]

Everyone I know that has had the option in recent years has chosen the lump sum. DW took a lump sum and rolled it into her 401k with Fidelity. I wasn’t given the option myself.

 

[rk911]

Everyone I know that has had the option in recent years has chosen the lump sum. DW took a lump sum and rolled it into her 401k with Fidelity. I wasn’t given the option myself.

same for my wife and myself...we're on govt DB pensions. but if we had been given the option we'd have taken the lump sum and rolled it. better choices..more choices...and we can leave it to someone else when we are gone.

 

[timbervest]

The lump sum value is the present value of future expected payments so it's kind of like the company is thinking "how much money do we need to have now earning interest to make sure we can pay freedom2022 his pension for the rest of his life". That lump of money has to be bigger if earnings (i.e., the rate you discount the stream of payments at) is lower. Bottom line, take the lump sum and invest it smarter yourself.

 

[njhowie]

Not all plans offer the lump sum option. So that is the first thing to confirm.

See if your pension administrator provides a website where you can check the value of your account and play with what-if scenarios while varying retirement age, type of annuity if you opt for that, or amount of a lump sum. My pension with first-job-megacorp-from-35-years-ago is administered by Fidelity and in the years before I began taking distributions, I was able to play with the numbers as frequently as I liked. They didn't offer a lump sum like last-job-megacorp, so I'm now receiving monthly payments from Fidelity for that.

The lump sum amount will be higher when interest rates are lower, and vice versa.

As far as your plan administrator not cooperating with you on specifics you're looking for and saying they don't do that until after retirement, that's utter nonsense. Again, check if they have a website that tracks your accumulated amount and lets you run the calculations. If they are a big administrator, they probably do offer this. If not, don't give up if you really want the info to be able to plan appropriately.

 

[pb4uski]

Everyone I know that has had the option in recent years has chosen the lump sum. DW took a lump sum and rolled it into her 401k with Fidelity. I wasn’t given the option myself.

Well, not everyone. My lump sum offer was about 75% of the annuity value of my pension benefits based on immediateannuity.com pricing at the time and I believe that is typical. Most people eyes bug out when they see that big six-figure number and they jump on it even if it is a bad deal.

Taking the pension added diversification to our income sources.

 

[Carlos2]

Everyone I know that has had the option in recent years has chosen the lump sum. DW took a lump sum and rolled it into her 401k with Fidelity. I wasn’t given the option myself.

This is not always the case to take the lump sum. If I had taken the lump sum instead of my government pension, I would be in a big minus. My lump sum would have given me $450,000+. However, my pension started off with six figures and my wife will get the same when I pass. She’s quite a few years younger.

Not everyone’s situation is the same so we have to look at our individual circumstances.

 

[bada bing]

+1 on carefully evaluate before taking a lump sum.

Private pension plans are all over the place on their terms and conditions. I was bounced around in my career and vested in 4 different mega-corp pensions. All were different in their terms, conditions and funding status. I have since taken lump sum offers from 2 of the pensions and would from a third one if offered, The fourth I'll let ride because it has very good terms.

One important factor to check is if your pension allows deferral and what the terms are for deferral. One pension I have in deferral currently pays 5%/yr towards the lump sum and a further 3%/yr mortality credit with no downside risk. If I die before annuitizing or taking the lump sum, the lump sum would be part of my estate. No way I would lump sum out of that one before they force me to choose (at age 72). Those are the old grandfathered terms that weren't offered to new hires after 2004.

Don't just dump a pension because you get excited about a lump of cash. If you don't feel comfortable evaluating it, hire a pro to look at it.

 

[Sunset]

Some pensions allow a person to do a 50/50 split, so that would be a pension + 1/2 of the lumpsum.

Just so there is more fun figuring out is it worth it.

 

[Montecfo]

My guess is that MOST lump sums are a bad deal.
Why? Because a lot of people will take that bad deal which then helps the pension.

But you have to run the numbers to determine that and compare to cost of annuities at the time. Also look at any other features of the pension.

 

[gauss]

Well, not everyone. My lump sum offer was about 75% of the annuity value of my pension benefits based on immediateannuity.com pricing at the time and I believe that is typical. Most people eyes bug out when they see that big six-figure number and they jump on it even if it is a bad deal.

Taking the pension added diversification to our income sources.

+1 Agreed.

Also studies of retirement "happiness" indicate higher scores with those receiving traditional pensions as opposed to managing it themselves.

-gauss

 

[gauss]

My guess is that MOST lump sums are a bad deal.
Why? Because a lot of people will take that bad deal which then helps the pension.

But you have to run the numbers to determine that and compare to cost of annuities at the time. Also look at any other features of the pension.

Actually, my understanding is that taking the lump can actually hurt the pension fund but benefits the company that sponsors it.

-gauss

 

[pb4uski]

I don't think the lump sum hurts the pension fund because the lump sum would likely be less than the accumulated benefit obligation for the pension payments.

Think of it this way, if the lump sum is less than the simgle premium for an immediate annuity with similar benefits and the immediate annuity is priced by the issuer to cover not only benefit payments but also overhead, taxes and profit then the lump sum is almost always less than the reserve that the pension plan holds to provide for those pension benefits so the plan usually has a gain on any lump sums.

The gain benefits the sponsor because it increases the resources of the pension plan and ultimately reduces the employer's required future contributions to the pension plan.

 

[street]

Lump sum here. Mine has just about tripled in 5 years. The one thing to keep in mind is if you take the annuity/monthly payment and if you die what happens to those funds??

In my plan the money stops, no one get the money and it goes and stays with the financial company. I had options for life ending but those option after life ending were terrible choices.

I didn't need a pension and wanted my stash to grow so lump it was for me.

Good luck and choice what you want from your money.

 

[njhowie]

Lump sum here. Mine has just about tripled in 5 years. The one thing to keep in mind is if you take the annuity/monthly payment and if you die what happens to those funds??

In my plan the money stops, no one get the money and it goes and stays with the financial company. I had options for life ending but those option after life ending were terrible choices.

I didn't need a pension and wanted my stash to grow so lump it was for me.

Good luck and choice what you want from your money.

You are initially given choice of options - guaranteed period or no, (100%/75%/50%) survivor benefits or no, etc.

With my plan which did not offer lump sum, I took 100% survivor benefits so if I pass, DW will continue receiving the monthly payments until she passes. If we're both gone, we obviously don't need the money any longer. Depending on the option(s) you choose, it's going to have an effect on the monthly payment amount.

With my other pension, from the last megacorp I worked at, they did offer lump sum, which I took, and that has grown nicely since.

 

[savory]

+1 Agreed.

Also studies of retirement "happiness" indicate higher scores with those receiving traditional pensions as opposed to managing it themselves.

-gauss

+1 for me too. For me, pension, deferred bonus income (to be replaced by SS), and some of the dividends and interest has allowed me to not touch my investments. I am very comfortable that DW and I, will never be a cash burden to our children as pension and SS will likely cover expenses. And we are still in a position to financially positively impact their financial health.

I expect if I had taken the lump sum, given the market growth over the last few years, I could have used the same words for describing my situation. But having the combination of a regular monthly check, SS and saving growth, very much like when I was employed, provided more comfort for us.

 

[pb4uski]

...The one thing to keep in mind is if you take the annuity/monthly payment and if you die what happens to those funds??

In my plan the money stops, no one get the money and it goes and stays with the financial company. ...

True, but on the other hand, what if you live to 108 like the OPs mother in another thread?

I chose the pension more for diversification of income sources even knowing that I would likely do better if I took the lump sum and invested it since I could invest it more aggressively than a pension plan that must provide for benefits for the life of its participants can... so in assessing the lump sum I looked at it more as a bond than stocks or a mix of stocks and bonds.

 

[street]

Lump sum isn't for everyone. The survivor benefit options (100% to 50%) just never penciled out for me in my case.

Having full control of the money and having that money work for me has been the best choice for me.

I dislike annuities and paying that expensive cost of owning an annuity. That money is better in my pocket and control. Just my 2¢.

I also have never followed the normal path to financial independence so take my way with a grain of salt.

 

[njhowie]

I dislike annuities and paying that expensive cost of owning an annuity. That money is better in my pocket and control. Just my 2¢.

The "annuity" which a pension provides is not the same as those that you would pay hefty fees on if you go in to the market and purchase directly on your own.

Yes, it is an annuity product. However, the employer is paying a good portion of the fees to the administrator (e.g. Fidelity) and it is usually on a large scale that those fees are low when spread over the number of participants. Further, Fidelity, or other administrator is not employing salespeople taking commissions - which contribute to much of the fees in other annuity products.

 

[street]

^ I realize and am full aware. It costs you money for them to handle that money annuity in one way or another. If I died there payment is huge. Lol

I'm not hear to argue all of your disapprovals of my way of getting to the end. I'm not here to convince anyone of my way, just pointing out my view on what I did. Annuities aren't for everyone and neither is lumps.

 

[njhowie]

^ I realize and am full aware. It costs you money for them to handle that money annuity in one way or another. If I died there payment is huge. Lol

I'm not hear to argue all of your disapprovals of my way of getting to the end. I'm not here to convince anyone of my way, just pointing out my view on what I did. Annuities aren't for everyone and neither is lumps.

I can appreciate that, and there's likely just as many folks here who have taken lump sums vs. the annuity. As I mentioned, I have one of each.

However, you are justifying/debating your decision/position based on points which may be insignificant.

In the end, if it works for you, then it's all good...no need to convince anyone of your decision. Nobody is disapproving. It was right for you.

 

[Chuckanut]

Assuming this is a very large amount of money for you, I would spend some cash and consult a CPA and see what she/he says.

I did not have the option of converting my pension to a pile of cash. In fact, I purchased credit for five years of additional service to increase my monthly check by $380 at a cost of approximately $72,000.

Why? First, the pension payout has a capped COLA adjustment. The COLA adjustments have been low since I retired, but it looks like the next one will exceed the cap for the first time since my retirement. Second, it diversifies my income stream. And who knows? If I live long enough I can spend my last few years bragging about how I hit the pension Bonanza.

YMMV.

Note: had my pension not had that capped COLA I would not have bought the additional years.

 

[chassis]

Hi all,

I have a defined benefit plan with the company I work for.
Some define benefit plan allow a lump sum transfer to a registered pension plan of your choice.
I read that the commutated value of define benefit plan is more when the interest rate is low. Is it true?

If so, I’d rather choose the lump sum transfer than a monthly pension.
P.S. I haven’t submitted a formal request for early retirement.
I have asked the pension plan administrator about commutated value. But they are not open to respond about it. The pension plan only explains about monthly pension income after retirement. And I heard from colleague who left company that he opted a lump sum transfer.

Thanks in advance.

Lump sum is better in my view for two reasons:

1. Lump sum money will earn stronger returns in the hands of the investor, if the investor is good at, and enjoys, investing.

2. Lump sum money is heritable beyond a surviving spouse. A defined benefit pension is not.

If heritability is not interesting, don't take the lump sum. If you are not skilled at, or enjoy, investing, take the lump sum.

I took a lump sum and am glad I did.

 

[Montecfo]

Actually, my understanding is that taking the lump can actually hurt the pension fund but benefits the company that sponsors it.

-gauss

Well, if the lump sum is less than the actuarial value of the pension, then it benefits the company offering the pension, since their future funding obligation is reduced by more than what they paid out.

That was my meaning.

 

[pacergal]

As with the when to take SS question, Lump vs monthly check depends on individual circumstance.
How much the total is
If there is a COLA
If there is survivor benefit and what it is
If you have other investments/savings
DH and I have govt pension. We took 100% joint survivor so the monthly amount will last for the rest of our lives. Our pension is enough to pay our bills and save some every month. It is COLA'd.
We did not retire with huge sums of money, but our pension allows us to live like we do! We have more than I ever thought we would years ago. We are definitely blessed with what we have.

You make the best decision for you own circumstances. Investigate, run scenarios, check your spending/budget.