With the end of the year approaching pension buyout offers are all the rage among corporations wanting to reduce their corporate pension liability. Major employers such as The Hartford Financial Services Group, Inc. (HIG) and Boeing Co. (BA) have made offers to former employees that include offers to take their accrued pension benefit as a lump-sum payment. In some cases these offers also include an option to take an annuity with an insurance company.
If you receive such an offer should you accept it? Like so many questions in the world of financial planning the answer is “…it depends.”
What’s In It for Them?
The reward for these companies can be great. Future pension liabilities can amount to a huge expense for these companies. Getting these liabilities off of the books can be a huge financial windfall for their bottom line. (For related reading, see: A Primer on Defined-Benefit Pension Plans.)
What’s In It for You?
That’s the question that you will need to answer. Here are a few thoughts:
The lump-sum option allows you to take control of this portion of your retirement benefit. You would typically roll the lump-sum into another retirement account, such as an IRA, where you can invest the money as you see fit. Assuming that you are comfortable investing these funds or have a trusted financial adviser this allows you to invest this money in line with your financial plan.
The annuity option, if offered, is often via an insurance company versus the company. The advantage here might be a sweetened monthly payout or even access to a stream of payments sooner than might be available if you waited for your normal pension benefit. (For more, see: Can you Count on Your Pension?)
Factors to Consider
Each buyout offer is a bit different and sometimes you will be given several options which might include keeping your pension as is, a lump-sum payment, or an annuity via an insurance company. Any of these might be a viable option for you; it will depend upon your individual circumstances.
Do you have concerns about the financial health of your former employer? If this is the case it might behoove you to take the buyout offer. Private sector pensions are protected by the PBGC, public sector pensions are not. PBGC insurance may guarantee your entire pension payment unless the amount of your benefit exceeds their maximums. (For more, see: An Overview of the Pension Benefit Guarantee Corporation.)
Who will be guaranteeing your annuity payments? If your buyout offer includes an option for annuity payments these are likely coming via an insurance company because, again, your former employer is looking to get the liability for your pension off of their books. Unlike with your former company, there is no PBGC guarantee if the insurance company runs into financial difficulty. Typically, your remedy in that case is with the insurance department of the appropriate state. (For more, see: The Pension Benefit Guaranty Corporation Rescues Plans.)
Are you capable of managing the lump-sum? Depending upon the size of the lump-sum distribution this may be one of the largest sums of money that you will ever receive. Are you comfortable investing this much money? Hopefully you would be rolling this lump-sum payment into an IRA account to preserve the tax-deferred aspect of this money. (For more, see: Tax-Saving Advice for IRA Holders.)
Time for a Financial Advisor?
This might be a good time to engage the services of a financial adviser if you are not already using one. A competent financial adviser can help you put this money to work in a fashion that is in line with your risk tolerance and financial goals.
Speaking of financial advisers, beware of brokers and registered reps who troll for rollover opportunities. By this I am speaking of instances where these advisers have placed rollover money into investments with their firms that were not appropriate for the investor and made a lot of money for the broker and their firm. This is not to say that rolling a lump-sum distribution over to an IRA is not the route to go, but rather that as an investor you need to understand where and how your money will be invested. (For more, see: Choosing a Financial Advisor: Suitability vs. Fiduciary Standards.)
What other retirement resources do you have? If you are eligible for Social Security and/or you have other pension plans available to you it could make sense to take a buyout offer in the form of a lump-sum. Take a look at all of your retirement accounts and those of your spouse if you are married. This includes 401(k) plans, 403(b) accounts, IRAs, etc. This is a good time to take stock of your retirement readiness and perhaps even to do a financial plan if don’t have a current one in place.
If most of your retirement money is in accumulation vehicles like a defined contribution plan or an IRA staying with your pension and taking the annuity payout now or down the road or going with an annuity via an insurance company might make sense for you. These options would diversify your income sources in retirement. (For related reading, see: Medicare Donut-Hole Essentials.)
The Bottom Line
Pension buyout options are becoming more prevalent as companies strive to lower their pension costs. If you receive a buyout offer review it carefully to see if this is a good deal for you. You might also consider engaging the services of a financial adviser knowledgeable in this area to assist you. (For more, read: Analyzing Pension Risk.)