• Steve Coker, CFP

Should I take my pension as a lump sum?

Updated: Jul 20


If you are trying to decide whether to take your pension as a lump sum or as monthly payments, then let’s start by saying ‘congratulations’. Few employers still offer pensions and you are fortunate to have this benefit as you face retirement. Pension payouts can be significant, so it is important to consider your options carefully. In this article we’ll walk through some of the common options for your pension payout to help you determine which is best for your situation.


First, let’s walk through some basics. A pension is separate and distinct from a 401k plan. Pensions are funded by contributions from your employer and have a defined benefit, which usually takes the form of a lump-sum payment, a monthly payment, or a choice between the two. The lump sum option is fairly straightforward - you receive one payment for the entire pension benefit. Some mistakenly believe that if you take the lump-sum you are required to immediately pay taxes on the full amount. This is not the case. Pension lump-sum payments can be rolled over to an IRA, allowing you to defer paying taxes until you withdraw the funds from the IRA.


On the other hand, the monthly payment option is designed to provide you with monthly payments, typically over your lifetime. Some mistakenly believe that if you take monthly payments for life, then there is no way to provide for a spouse upon your death. This is usually incorrect, as most pensions have multiple payout options including:


-Single life payment – the monthly payments will last for the life of the pension owner.


This is usually the highest payment but will pay nothing to a spouse or heirs upon the death of the pension owner.


-Single life with period certain – the monthly payments will last for the life of the pension owner, but if the owner dies before a specified term, the pension will continue payments to a spouse or heirs for at least the specified term. For example, a 20-year period certain means that the pension will continue for at least 20 years.


Selecting this option will reduce your benefit somewhat, but your spouse or heirs will have the added security of knowing that the payments will continue if you were to die early in your retirement.


-50% joint and survivor – the monthly payment is reduced compared to single life, but a surviving spouse will receive a lifetime monthly payment equal to 50% of the original amount.

This option is a good way to balance the monthly payment during life with an ongoing payment to the surviving spouse.

-100% Joint and Survivor – the monthly payment is reduced even more compared to single life and 50% joint and survivor but the surviving spouse will get 100% of the monthly payment for life.

This option provides for the maximum benefit for the surviving spouse


There are pros and cons to both the Lump-sum and monthly payment options. Here is a quick summary:


-Lump-Sum Pros:

· Control and flexibility – you get your money upfront and have complete control over the investing and spending.

· Provide for heirs – you can choose and change your beneficiaries. When you die, your heirs inherit the lump-sum.

· Pay taxes only when you use the funds – you can roll your pension lump sum into an IRA and pay taxes only when you take distributions.


-Lump-Sum Cons:

· You assume investment risk – you are responsible for investing the funds appropriately to create your own income stream. Since it is your money you bear the risk of loss for the investments.

· You must control your own spending – you have full ownership and control of the funds, and can overspend, and without proper planning could run out of money before you die.


-Monthly Payment Pros:

· Guaranteed income for life – your monthly payments are backed by the pension plan.

· Possible to provide income for your spouse – depending on which payment option you choose, you can also provide income for the life of your spouse.

· No investment responsibility or risk – the pension plan takes care of all the investing and you do not bear direct risk of loss if an investment within the plan fails.

· Convenience – you simply receive a monthly payment and there is very little hassle.


-Monthly Payment Cons:

· Monthly checks are taxed as ordinary income – you are taxed when the payments are received and there is no way to adjust the payments for a better tax outcome.

· No direct way to provide for your heirs – once you and your spouse die, payments cease and none of the pension passes to your heirs.

· Risk to the health of the pension plan – your payments are backed by the pension fund, but some pension funds are underfunded, putting pension beneficiaries at risk. All pension funds are insured by the Pension Beneficiary Guarantee Corporation, which provides a partial benefit if the pension fund fails.


I suggest that you read through the list and consider which pros fit best with your priorities and situation. Of course, we are also here to help. We would be happy to walk through the pros and cons with you, and help you run the numbers to help you determine which option is best for you.

DISCLOSURE Information on this website and others should be used at your own risk. Past performance does not guarantee future results. Securities investments involve risk; returns in such investments vary and may involve gain or loss. The materials and content herein are not a substitute for obtaining professional tax, personal financial planning, or other relevant financial advice from a qualified person or firm. For full disclosure click on the disclosure link at the bottom.

Subscribe to our Weekly Newsletter

2945 Townsgate Road Suite 200

Westlake Village, CA 91361

+ 888-571-5582

help@cedarstoneadvisors.com

Contact Us