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Pension cash out - is it ever a good idea

S

spidey07

No Lifer
Looks like a previous employer wants to buy out my pension. I haven't run the math on it yet, but the numbers are large (150k+). I'm thinking of how much I could grow that over 10-20 years, plan to retire at 50.

So the options are:
1) buy me out, lump sum
2) Various annuities
3) Stay with pension, take benefits at retirement

I had always considered this gravy money and constant income when I retire, so I'm torn between emotional security of that income vs. how I can make it make more for me.

So is it ever a good idea to cash out your pension?
 
Depends on your tax brackets.

Cashing out $200,000 for someone who makes a mediocre salary can push them up a few tax brackets.

An annuity with some sort of guaranteed growth would be a solid option.
 
It's not so bad an idea in Canada right now if it's not your entire retirement savings, but I don't think the rules are nearly as generous in the US in terms of guaranteeing value and calculating payouts.

Are they offering annuities at the same payment amount as you'd get at retirement in the plan? That's probably a great option (as long as you're not losing benefits) as insurers are likely to be more stable than any employer plan and you'd be unlikely to have your benefit cut due to underfunding.

Please do not take this as professional advice, and a financial planner can probably give you a better answer taking into account your entire financial picture.

Edit: I'm also not sure of the taxation issue, which I imagine is vastly different from Canada.
 
Generally, they have run the numbers and decided that they'll pay less if you take the lump sum. You can run the numbers yourself, but I bet you'll likely come to the same conclusion. They are offering you it for a good reason: they want you to get less by taking the lump sum.

But this isn't a problem that numbers should be used to solve. Intangibles may be far more important. What is it worth to know that no matter what you won't be homeless and hungry? It is hard to put a number to that comfort.

I personally (not knowing any details) would keep the pension, and then be that much more risky in my own investing. Get the big bucks that way while keeping security.
 
0roo0roo said:
generally you don'[t want to do something they want you to do...
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This isn't always the case. If a plan is fully funded (or develops a surplus) paying a premium to transfer the risk to the member (cash-out) or an insurer (annuity) can still have benefits for the company.

As long as your payment at retirement and all ancillaries (indexation, early retirement subsidies, form of pension) are the same, in most cases insurer > employer plan, and there are employers who choose to purchase annuities simply to transfer the risk off their books.
 
dullard said:
Generally, they have run the numbers and decided that they'll pay less if you take the lump sum. You can run the numbers yourself, but I bet you'll likely come to the same conclusion. They are offering you it for a good reason: they want you to get less by taking the lump sum.

But this isn't a problem that numbers should be used to solve. Intangibles may be far more important. What is it worth to know that no matter what you won't be homeless and hungry? It is hard to put a number to that comfort.

I personally (not knowing any details) would keep the pension, and then be that much more risky in my own investing. Get the big bucks that way while keeping security.
Click to expand...

Thanks dullard. You're putting my head on straight. Tuff to turn the bird in hand down though.
 
dullard said:
Generally, they have run the numbers and decided that they'll pay less if you take the lump sum.
Click to expand...

In Canada, it's basically impossible for an employer to buy out a person from a pension plan for less than they'd expect to pay if you stayed in the plan (at least with bond rates the way they've been the last 10+ years). Even still, many sponsors still go through this exercise.

If there is an annuity option, it is almost certainly costing them more money than keeping it in the plan themselves.
 
soulcougher73 said:
I would value the security in the future. Especially with the way the US is going currently. I would not cash out.
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In general I agree, but OP needs to do his homework on the pension fund itself. It's not impossible for these promises to disappear in the future, leaving you with no security whatsoever.
 
actuarial said:
In Canada, it's basically impossible for an employer to buy out a person from a pension plan for less than they'd expect to pay if you stayed in the plan (at least with bond rates the way they've been the last 10+ years). Even still, many sponsors still go through this exercise.

If there is an annuity option, it is almost certainly costing them more money than keeping it in the plan themselves.
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The annuity options are based on survivor benefits, so it's incredibly difficult to comprehend on it's face. I think I need to speak to a professional with the details and my family's plans.

This is no longer "do the math" thing and involves emotional decisions. grrrr....

I don't like annuities.
 
I treat all pensions as if they are going to go poof tomorrow. Take the money and invest in muni bonds, annuities, or high dividend paying stocks depending on your risk tolerance.
 
You have two options really:

1) Take the advice in this thread
2) Cash out and buy a brand new Dodge Viper

--

I assume this pension is backed by some insurance fund in a manner such that if the company goes belly up (one must assume it should to be safe) you are not left in the lurch, but then I don't know much about pensions because I'm too young to ever had had the chance at a good one and probably will be working until the day before I die.
 
I just went though this with a previous employer. I took the lump sum and rolled it into my 401k plan to avoid the tax penalties.

You may want to check and see of you can pay the tax and roll directly into a Roth. Generally that's one of the few ways to put a large sum into Roth.
 
Slew Foot said:
I treat all pensions as if they are going to go poof tomorrow.
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Doppel said:
I assume this pension is backed by some insurance fund in a manner such that if the company goes belly up (one must assume it should to be safe)
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OCGuy said:
They can just take your pension away later.
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Most pensions are federally insured, so you can't lose your money unless both the company and the country go belly up. In that case, I doubt any investment form would be worth much other than weapons and ammo.

Check here to see if a pension is insured, http://www.pbgc.gov/
 
spidey07 said:
The annuity options are based on survivor benefits, so it's incredibly difficult to comprehend on it's face. I think I need to speak to a professional with the details and my family's plans.

This is no longer "do the math" thing and involves emotional decisions. grrrr....

I don't like annuities.
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Annuities are the same thing as a pension plan. The only difference is who you receive the money from. You will have to consider those exact same decisions with respect to survivor benefits when you retire from the plan.

Is your pension indexed? From my quick reading the PBGC does not insure the indexation of benefits.
 
Paratus said:
I just went though this with a previous employer. I took the lump sum and rolled it into my 401k plan to avoid the tax penalties.

You may want to check and see of you can pay the tax and roll directly into a Roth. Generally that's one of the few ways to put a large sum into Roth.
Click to expand...

Lump sum withholds 20%. Tax implications can be figured out, but that is what is hold.
 
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