Pension Proceeds: Making the Most Suitable Choice

Pension Proceeds: Making the Most Suitable Choice

May 12, 2022

Thoughts of retirement may be accompanied by images of the enjoyable ways you’ll spend your days. One thing you may not even consider, though, is that you may be faced with a very important decision come retirement day. If you participate in a company pension plan, you’ll have to decide how you want to receive your pension proceeds. For this reason, take the time now to consider your options, so when the time comes, you can make the choice that’s most appropriate for you.

Typically, most pension plans give retirees three choices:

  1. Income for the rest of your life (single life option)
  2. Income for the life of you and your spouse (joint and survivorship option)
  3. A lump-sum distribution

At first glance, you might think your marital status will dictate which option is best for you. But there’s a lot more to it than that. Let’s take a closer look at the options. The first two (single life and joint and survivorship) provide you with a fixed income (usually in monthly installments) in exchange for your pension balance. While the third option (lump sum) allows you to take your entire pension balance so you can manage it yourself.

If you’re worried about outliving your assets, regardless of your marital status, you should take one of the two “income” options. It’s a simple way to ease your fears about running out of money. If you’re single, this choice is easy, because you can only select the single life option. However, if you’re married it’s a different story altogether, because you can choose either income option.

The single life option pays a higher monthly income, but payments cease at your death. While the joint and survivorship option pays a lower monthly income, payments continue until the death of both you and your spouse. If you have other substantial retirement assets, or your spouse has his or her own pension, taking the larger income offered by the single life option may be your best bet. On the other hand, if your pension is all you and your spouse have, the spousal security offered by the joint and survivorship option may be the way to go.

As previously mentioned, both of these payout options require that you give up your pension balance in exchange for income. In other words, you can’t just select a payout option one day and then decide at a later date that you’d like to receive your remaining pension balance in a lump sum. With this in mind, let’s turn our attention to the final payout option—the lump-sum distribution.

Taking Control

If you want full control over your pension assets during retirement, or are concerned that your pension income may not keep pace with the cost of living, then a lump-sum distribution may be the choice for you. You can take a lump-sum distribution in one of two ways. You can either roll it over into your own Individual Retirement Account (IRA), or you can receive the pension proceeds net of income taxes. Unless you plan on using your pension assets for something other than retirement, consider other options than receiving your lump sum net of income taxes. The IRA rollover may make the most sense, because you’ll continue to receive the benefits of tax-deferred accumulation, and only be taxed when you take withdrawals from the IRA.

As you can see, before you can relax into a comfortable retirement, you must make a difficult decision about your pension proceeds. This will require you to carefully consider several options to determine which one is most suitable for your financial needs and goals. By taking this step today, you can mitigate “pension tension” as retirement day nears.


Important Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal.  Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

This article was prepared by Liberty Publishing, Inc.

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