Corporations are transferring pension
liabilities to third parties. Where does this leave retirees?
Provided by Taylor McClish
A
new term has made its way into today’s financial jargon: de-risking. Anyone
with assets in an old-school pension plan should know what it signifies.
De-risking
is when a large employer hands over its established pension liabilities to a
third party (typically, a major insurer). By doing this, the employer takes a
sizable financial obligation off its hands. Companies that opt for de-risking
usually ask pension plan participants if they want their pension money all at
once rather than incrementally in an ongoing income stream.
The de-risking trend
began in 2012. In
that year, Ford Motor Co. and General Motors gave their retirees and
ex-employees a new option: they could take their pensions as lump sums rather
than periodic payments. Other corporations took notice of this and began
offering their pension plan participants the same choice.1
Three years later, the Department of the Treasury
released guidance effectively prohibiting lump-sum offers to retirees already
getting their pensions; lump-sum offers were still allowed for employees about
to retire. In March 2019, though, the Department of the Treasury reversed
course and issued a notice that permitted these offers to retirees again.1
So,
whether you formerly worked or currently work for a company offering a pension
plan, a lump-sum-versus-periodic-payments choice might be ahead for you.
This
will not be an easy decision. You will
need to look at many variables first. Whatever choice you make will likely be
irrevocable.2
What is the case for
rejecting a lump-sum offer? It
can be expressed in three words: lifetime
income stream. Do you really want to turn down scheduled pension payments
that could go on for decades? You could certainly plan to create an income
stream from the lump sum you receive, but if you are already in line for one,
you may not want to make the extra effort.
You
could spend 20, 30, or even 40 years in retirement. An income stream intended
to last as long as you do sounds pretty nice, right? If you are risk averse and
healthy, turning down decades of consistent income may have little appeal –
especially, if you are single or your spouse or partner has little in the way
of assets.
Also,
maybe you just like the way things are going. You may not want the
responsibility that goes with reinvesting a huge sum of money.
What is the case for
taking a lump sum? One
line of reasoning has to do with time. If you are retiring with serious health
issues, for example, you may want to claim more of your pension dollars now
rather than later.
Or,
it may be a matter of timing. If you
need to boost your retirement
savings, a lump sum may give you an immediate opportunity to do so.
Maybe
you would like to invest your pension money now, so it can potentially grow and
compound for more years before being distributed. (As a reminder, pension
payments are seldom adjusted for inflation.) Maybe your spouse gets significant
pension income, or you are so affluent that pension income would be nice, but
not necessary; if so, perhaps you want a lump-sum payout to help you pursue a financial
goal. Maybe you think a pension income stream would put you in a higher tax
bracket.2
If
you take a lump sum, ideally, you take it in a way that minimizes your tax
exposure. Suppose your employer just writes you a check for the amount of the
lump sum (minus any amount withheld), and you direct that money into a taxable
account. If you do that, you will owe income tax on the entire amount.
Alternately, you could have the lump sum transferred into a tax-advantaged
investment account, such as an IRA. That would give those invested assets the potential
to grow, with income taxes deferred until withdrawals are made.2
Consult a financial professional about
your options. If you sense you should
take the lump sum, a professional may be able to help you manage the money in
recognition of your financial objectives, your risk tolerance, and your estate
and income taxes.
Taylor McClish may be reached at (503) 239-3060 or Taylor.McClish@cunamutual.com
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Citations.
1 - cnn.com/2019/03/20/economy/lump-sum-pensions-retirement/index.html
[3/20/19]
2 - fool.com/retirement/2018/06/18/lump-sum-or-annuity-how-to-make-the-right-pension.aspx
[6/18/18]