In March 2019 the Treasury Department issued an IRS notice that allows employers to buy out current retirees from their pensions with a one-time lump sum payment, reversing a 2015 ruling that effectively banned this practice after officials determined that a lump-sum buyout often shortchanged seniors. A pension annuity offers a guaranteed monthly defined payment to retirees based on the pension rules. A one-time pension lump sum buyout leaves the money to the retiree to determine how to invest and manage.
AARP Legislative Counsel David Certner said,
“Permitting plans — for their own financial benefit — to replace joint and survivor or other annuities with lump-sum payments will reduce the retirement security of both workers and their spouses.”
In 2015, the Government Accountability Office issued a report on lump sum payouts that retirees who tried to reinvest the lump-sum payments would almost inevitably lose out — especially women, who tend to live longer than men and are more likely to run out of money in retirement.
Kiplinger has advice for retirees on how to evaluate and choose between a lump sum retirement payout versus a monthly pension annuity:
1. Consult a Fiduciary Adviser
An adviser can calculate the present value of your future pension benefits and compare it against the lump sum.
2. Use an Online Tool
An online tool such as immediateannuities.com to calculate the monthly income you would receive if you invested the lump sum in an annuity and compare it to how much you would receive in your monthly pension benefit.
3. Calculate Investment Fees
Investment fees can be one-time or asset-based and will impact your investment.
4. Surviving Spouse
Will a pension or a lump sum payment better protect your spouse or other heirs?
It’s important that retirees meet with a financial planner and experienced estate planning attorney to evaluate the best pension buyout decision to protect themselves and their loved ones.
Meeting with an estate planning attorney helps you prepare for the unknown and the unexpected. Though it may be tempting to put off, creating an estate plan can help prevent serious issues down the road. When you work with an attorney to decide what will happen to your assets after you die, they can create an estate plan that gives you peace of mind today. To talk to an estates and probate attorney contact the Estate & Probate Legal Group in Lombard Illinois at (630) 382-8069.