Options for a Pension Plan Lump Sum

Jacobson, Jr., Allen F.
June 2008
Journal of Financial Planning;Jun2008, Vol. 21 Issue 6, p44
Academic Journal
• Participants in defined-benefit pension plans with a lump-sum option have three choices regarding the value built up in the plan: (1) take the benefit as a lump sum and invest the proceeds, (2) use the lump sum to buy an annuity from an insurance carrier, or (3) elect the annuity benefit available inside the pension plan. This article provides a framework for participants and their financial advisors to make the benefit election decision. • The price for the individual annuity available in a pension plan is usually lower than what the retiring participant could buy in the individual market. Therefore, most participants will receive a larger monthly benefit from the pension plan than what they could buy elsewhere. The difference is most striking for female participants because of the unisex pricing required in qualified pension plans. • The difference is likely to grow over the next four years as plans migrate to new lump-sum assumptions allowed under the Pension Protection Act of 2006. Because of differences in pricing among carriers, shopping the annuity market may be worthwhile for male participants. • Private-sector pension plans covered by the Pension Benefit Guaranty Corporation are insured only up to certain benefit levels, so participants with significant benefits in such plans should be aware of that financial risk to their pension benefits. These participants should carefully review benefits available in the plan versus those they can buy elsewhere. • The difference in pricing of annuities is significant enough that only participants with very large pension benefits and real concern for those benefits should consider taking a lump sum from the pension plan and buying annuity benefits from a carrier.


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