Posted on Jan 8, 2021

At age 66 and widowed, Eric was ready to retire and faced with a choice: take a one-time lump sum benefit equal to the $550,000 he had in his defined benefit pension plan, or opt for an annuity that would pay him roughly $50,000 per year. As with many financial decisions, there were pros and cons for each choice. If he decided to take the lump sum payment, he would be assured that all of the funds were his, with no risk of a possible future reduction of monthly annuity payouts if his employer encountered financial difficulties or went bankrupt. This was a possibility given the economic impact of the pandemic on his company’s revenues.

While the Pension Benefit Guaranty Corporation (PBGC) protects the retirement incomes of millions of Americans by insuring certain private-sector pension plans, there are legal limits and restrictions. The PBGC does not guarantee it will cover 100% of the money workers were promised; payments are limited to set monthly maximums. Moreover, employers can and do terminate pension plans, and fewer and fewer companies these days offer traditional defined benefit plans at all.

On the other hand, taking the lump sum payment also carried risks. Eric would have to manage the money himself and spend it wisely to make it last through his retirement years. However, he would also have greater control of what to do with these funds, and he could roll them over into an IRA and make different investments. He could also pass any unspent funds to his children as an inheritance, an option not available with annuity payments that would stop upon his death.

There are annuity options that do provide survivor benefits, making this option attractive for some people. Additionally, for some people a steady income stream offers greater peace of mind and less worry about managing a lump sum payment. Deciding what choice to make depends on a number of factors, including outstanding debt, medical needs, and life expectancy.

This material is provided for informational purposes only, and is not intended as authoritative guidance, legal advice, or assurance of compliance with state and federal regulations.




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