Pension Buyout Offer: Should Your Clients Take An Annuity Or Lump Sum?

If you participate in a pension plan at work, you might be offered a buyout at some point.

This could happen if your employer wants to shrink its future pension obligations or if your company has been bought, and your new employer decides to terminate your existing pension plan. In either case, you will likely have two main options: You can take your pension as a lump sum of your accrued benefits, or you can convert it to an annuity, which can be structured to provide you with a lifetime income stream. Which choice is best?

There's no right answer, but here are some factors to consider: Comfort in investing - If you take your pension as a lump sum, you can invest it yourself - but you'll be solely responsible for making the money last throughout your retirement.

To help ensure your lump sum is invested in a way that's appropriate for your goals and risk tolerance, you may want to work with a financial professional.

Other sources of retirement income - If you don't think you will have enough money from other sources - such as Social Security and your investment portfolio - to meet your essential living expenses during retirement, you may want to consider taking your pension funds as a lifetime annuity. (Keep in mind that the lifetime income payments from an annuity are subject to the issuer's ability to meet its commitments.)

Conversely, if you think your retirement income will be more than sufficient to meet your living expenses, you could take the lump sum and put it in a mix of investments, some of which could offer long-term growth potential.

Projected longevity - If you come from a long-living family and you are in good health at the time of your pension buyout, you may want to annuitize your pension to provide a source of income you can't outlive. However, if you anticipate a shorter life span, possibly due to your family's medical history, you might be better off by taking the lump sum.

Wealth transfer goals - You might not be able to transfer a pension's annuity payments to your children or grandchildren. On the other hand, by taking the lump sum and investing it, you might have assets remaining at the time of your death - and you can include these assets in your estate plans.

Taxes - If you take your pension buyout as a lump sum, it will be taxable as ordinary income, unless you roll it over to an IRA or an employer's qualified retirement plan. A direct rollover from your employer's pension plan to your IRA provider won't incur immediate taxes and can allow your investment to grow on a tax-deferred basis.

Consult with your tax advisor before making this rollover. (Eventually, you will be taxed on the withdrawals, and withdrawals made before you reach 59 ½ may be subject to a 10% tax penalty.)

It's worth noting that some pension plans may allow you to split your benefit between an annuity and a lump sum, although these plans seem to be in the minority.

Clearly, you'll have much to consider if you're offered a buyout of your pension. So, take your time, evaluate all the factors, and work with your tax, legal and financial professionals to reach the decision that makes the most sense for you.

This article was written by Edward Jones for use by your local Edward Jones Financial Planner.