Ex-employer turning pension into annuity, rate of return too good to believe

[MikeyInMarin]

I have a small pension from an employer (Data General) I left in 1999. Later DG was merged into EMC, then EMC was bought by Dell. I retired in 2023 and did not claim the pension. I am living off retirement savings until I start SS at 70.

Now Dell wants to rid itself of the pension liability by offering an IRA rollover payout or buying an annuity (of their choosing) for me. The payout value is $183k, and the annual income stream is $15,9k, giving a 8.66% return rate. Given the negative market turbulence starting this year (for me, the stagflation threat, US$ drop - as I live in France), I have decided to minimize these withdrawals. So decided to claim this benefit. That seems like a rather good rate.

My question: I have a small bit of time to choose the rollover instead. Perhaps that rate is too good (annuity default risk)?

 

[athena53]

Remember that the 8.66% return rate is a combination of investment results plus some return of principal. Is that rate guaranteed or does it depend on investment results, with a floor and a max rate? Is there a guaranteed death benefit if you don't live very long after it starts?

I'm a retired property-casualty (not life/annuity) actuary and annuities scare me because there are so many moving parts. I'd be inclined to take the lump sum.

 

[jebmke]

The best way to determine if this is a good deal is to price a similar annuity on the open market.

 

[VanWinkle]

You should be able to check the funding of an annuity to get a rating on the annuity company. It really depends on their rating and how you feel about having an income floor to cover your basic expenses.
The annuity plus SS at 70 might cover all of your basic needs? More info is needed to make an informed
decision, but your appetite for risk in investing would also come into play. Good luck with whatever you decide.

 

[audreyh1]

Yeah, 8.66% is the payout rate, not return. Different animal.

And you do want to compare to an annuity you could buy yourself after rolling over. Companies often to provide better deals. immediateannuities.com is a place to start.

 

[silvor]

Put the lump sum in fire Calc along with the rest of your investments and see if there’s any difference.

Anytime I’ve looked at taking an annuity or investing, thelump sum in the market, usually the market wins at least by a little

 

[jazz4cash]

Both of my DB pensions have been converted to annuities. These are simple SPIA type products without a lot of moving parts. The pension funding was borderline OK but these corps just want these old liabilities off their books.
I am very comfortable with the A rated insurers chosen to provide the payments and the transition has been seamless

I had already chosen the pension so I had no option to take a lump sum instead of the annuity. I chose the DB pension becsuse my employer offered a subsidy on the survivor benefit so make sure the benefits match.

 

[MarieIG]

Yeah, 8.66% is the payout rate, not return. Different animal.

And you do want to compare to an annuity you could buy yourself after rolling over. Companies often to provide better deals. immediateannuities.com is a place to start.

Yes. Schwab also lets you run numbers for current offerings. I did this recently.

 

[Texas Proud]

You did not say age... but I put in immediateannuities.com with 66YO and the life annuity came out to be

$1,248 a month... or $14.9...

Sooo, $15.9 seems to be a bit better than you can get...

But that is if you WANT an annuity... you might not want one...

 

[TheWizard]

You did not say age... but I put in immediateannuities.com with 66YO and the life annuity came out to be

$1,248 a month... or $14.9...

Sooo, $15.9 seems to be a bit better than you can get...

But that is if you WANT an annuity... you might not want one...

Payout phase annuities are great fun, especially if you have a decent amount of investible assets as well.

The extra income takes a load off the investments and allows them to grow better in retirement...

 

[MikeyInMarin]

Yeah, 8.66% is the payout rate, not return. Different animal.

And you do want to compare to an annuity you could buy yourself after rolling over. Companies often to provide better deals. immediateannuities.com is a place to start.

Thanks. I did use immediateannuities.com to get a comparison. The payout rate of the Dell annuity is 8% higher. And I did an estimate at Schwab (from another posting) and got a similar payout rate.
That concerns me - as too good to be true.

 

[DEC-1982]

Companies often to provide better deals. immediateannuities.com is a place to start.

I agree and believe that companies (your employer or another company to whom the pension has been offloaded) do give a better deal than what you would get by yourself in the open market.

If the rate is very significantly higher then you might want to look further into it as to why it is so much better.

 

[pjigar]

See my signature! If someone is paying you x% on an annuity then they must make significantly more than x% so there has to be a catch somewhere in the fine prints. I would take a lump sum and invest in 60:40 portfolio. YMMV.

 

[audreyh1]

Thanks. I did use immediateannuities.com to get a comparison. The payout rate of the Dell annuity is 8% higher. And I did an estimate at Schwab (from another posting) and got a similar payout rate.
That concerns me - as too good to be true.

Is the insurance company providing the annuity highly rated? What are the constraints such as reimbursement on early death, spousal benefits, etc. these all affect the payout rate and you want to make sure comparisons match.

 

[MikeyInMarin]

Is the insurance company providing the annuity highly rated? What are the constraints such as reimbursement on early death, spousal benefits, etc. these all affect the payout rate and you want to make sure comparisons match.

I have no way to do this!
Dell chooses the annuity provider - months after I choose to take an annuity. They did provide a long list of potential insurers.

 

[latexman]

I have no way to do this!
Dell chooses the annuity provider - months after I choose to take an annuity.

An unknown risk, so take the lump sum.

 

[Jerry1]

When I had that choice, the pension was definitely a better deal than a similar annuity. One thing about the pension was that it was covered under the Pension Benefit Guaranty Corporation (PBGC). I don’t know if I’d feel as comfortable taking just a regular annuity.

 

[Trailwalker]

I would also want to know the tax implications of lump sum vs. annuity.

 

[TheWizard]

I would also want to know the tax implications of lump sum vs. annuity.

Since this is apparently "qualified" money, it will be taxed as Ordinary Income no matter how withdrawn, via annuity, RMD, or otherwise, QCDs being the obvious exception...

 

[MikeyInMarin]

I have no way to do this!
Dell chooses the annuity provider - months after I choose to take an annuity.

When I had that choice, the pension was definitely a better deal than a similar annuity. One thing about the pension was that it was covered under the Pension Benefit Guaranty Corporation (PBGC). I don’t know if I’d feel as comfortable taking just a regular annuity.

I agree totally with you! But that isn’t an option for me. Dell is getting rid of their pension liability.

I might just do the rollover instead, and forgo the extra income right now.

 

[skyking1]

Payout phase annuities are great fun, especially if you have a decent amount of investible assets as well.

The extra income takes a load off the investments and allows them to grow better in retirement...

This, along with a consideration of your other funding would be used together to figure out the best path.

 

[Running_Man]

For a 66 year old male a standard quote from an Annuity you would be able to select is $14,383 per year with a 10 year guarantee. Dell is not giving you a great rate unless there are additional riders.

Having worked in companies that were closing pensions down, the only goal is to get the pension liability off the balance sheet and make a profit. Paying an annuity or lump sum is far cheaper than the rules for valuation of a pension. Here is the EMC pension assets per the 2024 DELL 10K. As the recent increases in stock market has led to elimination of underfunded status, Dell did not need a distressed approval from Pension Guaranty Fund. My guess is they will make about 100 million off of this conversion. I would recommend based on all these factors that you take the lump sum as Dell incentive is to take the cheapest annuity charge from a company that meets the Pension Guaranty minimum qualifications in order to avoid future litigation.

 

[Koolau]

No expert here, but I'd say take the lump sum as well.

 

[TheWizard]

I don't know much about this Pension Guarantee Association.
But your annual amount is fairly modest, so I think you should be okay taking the pension/annuity...

 

[big-papa]

I have a small pension from an employer (Data General) I left in 1999. Later DG was merged into EMC, then EMC was bought by Dell. I retired in 2023 and did not claim the pension. I am living off retirement savings until I start SS at 70.

Now Dell wants to rid itself of the pension liability by offering an IRA rollover payout or buying an annuity (of their choosing) for me. The payout value is $183k, and the annual income stream is $15,9k, giving a 8.66% return rate. Given the negative market turbulence starting this year (for me, the stagflation threat, US$ drop - as I live in France), I have decided to minimize these withdrawals. So decided to claim this benefit. That seems like a rather good rate.

My question: I have a small bit of time to choose the rollover instead. Perhaps that rate is too good (annuity default risk)?

Was your original pension inflation indexed? You can't purchase an inflation indexed annuity in the US anymore. But back when you could the difference in initial payout for the inflation indexed annuity and nominal annuities was substantial. It wouldn't surprise me to be likewise for an inflation indexed pension vs a nominal annuity.

Cheers.