A lump-sum distribution of your pension may be another option when you're ready to decide on a defined benefit payout. In this case, your employer will either make a cash payment or transfer the amount to an IRA. Your employer calculates the amount you receive based on:
- what the plan would have paid you as an annuity over your projected life expectancy; and
- the current interest rate, which determines what the plan would have earned on the lump sum if it had been paid out in increments over your lifetime.
The lump-sum amount will vary with the prevailing interest rates. If interest rates are high, you'll receive a smaller lump sum than you would if rates were low.
Taking a lump sum could be a good choice if your spouse is significantly younger or you want to decide how to invest the money you get. You also have the option of working with a trusted and experienced investment professional. You'll get control over your assets—which could be important if you're concerned that the plan could be underfunded or that your employer could be acquired. A change in the ownership of your employer could result in major changes to the plan and to the pension you might qualify for after the acquisition. If you choose to have your lump sum pension distribution rolled over into an IRA, you can continue to defer taxes until you withdraw money later on.
Here's a quick comparison of annuities and lump-sum withdrawals:
Consider your pension payout options carefully. Once you have made your choice, you usually cannot change your mind.
If you're on the fence about what choice to make, please contact 80/20 Financial Services today. We charge absolutely zero for a second opinion.