If a Pension Is Part of a Retirement Plan, Consider an Annuity or Lump Sum, Says Andrew H. Hook, Virginia Retirement Planning Attorney

Hook Law Center (formerly Oast & Hook)

Virginia Beach, VA (Law Firm Newswire) March 31, 2016 – Some retirees and former employees have received offers from their employers to accept a lump-sum payment of their pension.

This is an offer that they must consider very carefully because it will entail a loss of income for the rest of their life, and they will be in charge of managing their own investments and ensuring that the funds last through retirement.

The IRS and Treasury made an announcement in July 2015 that they would forbid companies from offering lump-sum payments to retirees who were already getting a monthly pension. This is beneficial for retirees, and will help put an end to the most detrimental risk transfer practice. However, employers can still offer lump-sum payments to former employees who are qualified to receive a pension but have not yet begun to receive their pension. The majority of retirees will find that a guaranteed income stream is far more advantageous than a lump sum.

“While there are many options within retirement planning, depending on the circumstances, accepting an annuity would often be more beneficial to the retiree than a lump sum. However, it is best to consult a retirement planning attorney who can offer advice about investment options to ensure financial security,” said Andrew H. Hook, a prominent Virginia retirement planning attorney with Hook Law Center with offices in Virginia Beach and northern Suffolk.

Cases in which a retiree might want to consider a lump sum are if the retiree is ill, does not anticipate living much longer, and will not have a surviving spouse who will depend on lifetime income; or if the retiree already has a significant savings or other source of sufficient income, an example of which is pension from a spouse.

Among the issues that retirees may wish to contemplate is whether the retiree or the retiree’s spouse could live longer than the life expectancy. The lump sum is calculated on the basis of average life expectancies. If the retiree or the retiree’s spouse expects to live longer than expected, the lump sum will be inadequate.

Another factor to consider is whether the retiree is in a position to lose the pension. If the retiree is independently wealthy so that there is no need for a monthly pension, or the spouse has a significant pension, the retiree may be able to risk accepting the lump sum. In addition, an evaluation of the retiree’s investing skills is necessary in order to determine whether the retiree can earn a sufficient amount through investments to realize growth of the lump sum that will last through retirement.

There may also be tax consequences associated with accepting a lump sum. If the retiree accepts a lump sum, and does not roll it over directly into an IRA, the payment will be deemed income for the year, and the retiree may be in a higher tax bracket. Furthermore, if the retiree later decides to use the funds to buy an annuity from an insurance company, the retiree will, in all likelihood, receive a lower monthly payment than if the retiree had chosen to accept the annuity from the employer’s plan.