As we take our clients through our assessment process, retirement planning is often top of mind for those working in the corporate world. For those who are lucky enough to have one, a pension plan can be a wonderful piece of the retirement income pie. For most there is not much thought involved with the pension plan decision; turn it on when you retire and select the option that continues 100% of the income for your spouse if you pass away. While that works just fine, you’re most likely leaving money on the table and you lack control of the asset. Let me explain why…
A pension plan is a retirement plan that requires an employer to make contributions to a pool of funds set aside for a worker's future benefit. The pool of funds is invested on the employee's behalf, and the earnings on the investments generate income to the worker upon retirement. The employer guarantees that the employee receives a definite amount of benefit upon retirement, regardless of the performance of the underlying investment pool. The employer is liable for a specific flow of pension payments to the retiree (the dollar amount is determined by a formula, usually based on earnings and years of service), and if the assets in the pension plan are not sufficient to pay the benefits, the company is liable for the remainder of the payment.
Here in lies a couple major issues most never consider. First, the company holds and controls the asset on their balance sheet, you have no say in the investments selected. Second, the plan is both an asset and a liability of the company. If the investments under perform, the plan will be underfunded. If the company can’t make up the difference, you may receive a reduced benefit, the company might go bankrupt, and if you’ve seen any Wall Street movies from the 80’s and 90’s a corporate raider might come in to dismantle the company and use the plan for personal gain. Lastly, you don’t have options. You can take a lump sum or a fixed stream of income, there is no flexibility. When you and your spouse pass away, the income stops, there is nothing passed on to your beneficiaries. If that happens soon after starting the income, the company wins.
When it comes to retirement, I prefer to retain control of the asset, have multiple options and have the flexibility to make changes should needs change. All of this can be accomplished by moving the asset off the company’s balance sheet and onto yours using a fixed index annuity. The process is simple, we ask the pension administrator for your current lump sum option - the dollars you can take with you today, and for the income stream options for the age you want to retire. We then give those figures, your age, your spouses age and your intended retirement age to our independent insurance team. They take the lump sum amount to the highest rated carriers and have them present their income options. About 8 times out of 10, the retirement income offered by the fixed annuity is higher than the income offered by the pension plan.
Higher income alone would be reason enough to take the lump sum now and reinvest it into the fixed index annuity. I’ll also note that this is considered a qualified rollover and a non-taxable event. Another benefit comes in the form of control, you now own the asset. You can move it, change it, invest it, leave it to your beneficiaries. Some annuities can offer a higher, fixed income stream, others can offer a lower start but increasing income over time, if the underlying index investments perform positively. This is often an attractive option as most stock market years are positive, so an annual raise helps support increasing living expenses as time goes on.
The risk of the asset and income stream being there for your lifetime is now with the insurance company and not with your former employer, so selecting a highly rated, well capitalized carrier is important to mitigate that risk.
It’s rare that we come across a situation where moving the pension to an annuity you control doesn’t make sense. If you, or anyone you know has an old pension and wants to know if they can do better on their own, our team of experts can help. We’ll work with you to contact your pension provider for all the important details, we’ll shop it to the open annuity market and we’ll incorporate the findings into your overall retirement plan to make sure it’s the right choice. If you move forward, your Personal CFO will handle all the legwork of taking the lump sum and funding the new annuity. Please don’t hesitate to reach out if you want to know more!