Explore how the different pension payout options can help you reach your retirement goals.
When it comes time to collect your pension plan, you can generally either take a lump sum or monthly payments. The most appropriate course of action for you will depend on your unique personal situation, risk tolerance and financial priorities.
An Ameriprise financial advisor can help you evaluate and choose a pension payout option that fits with your retirement income strategy and financial goals.
Here’s what you’ll want to consider when you’re preparing to collect your pension:
What is a pension?
A pension is a defined benefit retirement plan that employers offer their workforce. It’s intended to provide a monthly retirement benefit for life for vested employees.
What are the different pension payout options?
You can receive your pension payment in several different ways:
- Monthly payments: As a vested participant in a pension plan, you qualify for a monthly benefit, one that is typically based on your years of service, salary and age at retirement. This monthly payment can generally be paid out in two ways; however, your company plan may offer other benefit options as well:
- Qualified joint life and survivor annuity: The payments generally continue for your life and for the life of your spouse, often at a reduced amount compared to other payout options.
- Single life annuity: With the consent of your spouse, you may choose a single life annuity, which provides larger payments but only continues while you’re alive. Some people select this option if they need the increased income or if their spouse is much older or unlikely to outlive them.
- Lump sum: Some pension plans offer the option of taking a one-time, lump-sum payment instead of monthly payments. If you choose the lump sum, you have the freedom to do whatever you’d like with the payment, including reinvesting the funds into an IRA or another investment account.
Should I take the lump sum or monthly payments?
Whether you take the lump sum or monthly payments will depend on your plan’s rules, as well as your personal situation and financial goals. You’ll want to run the numbers on which scenario may be the most financially beneficial to you, as well as consider other factors, such as:
- Your income needs: Do you have other guaranteed sources of income, such as an annuity or Social Security? Consider the mix of income streams you expect to draw from before making a decision.
- Risk tolerance: Monthly payments can be guaranteed for the rest of your life, which can give more conservative investors a sense of security. On the other hand, a lump sum can be beneficial if you value having more flexibility and control over your money.
- Life expectancy: Consider your medical history and the life expectancy of your family members – if your life expectancy is longer, guaranteed monthly payments can make more financial sense.
- Estate planning considerations: Review your pension plan rules with a professional to understand how your beneficiaries may fare in the event of your passing. A lump sum can be more easily passed on than monthly payments (especially if you have non-spouse heirs) but there may be tax consequences.
- Your financial goals: Monthly payments may be more practical if you appreciate the steady source of retirement income, while the lump sum may be a smart move if it can help you reach other financial goals, like paying cash for a home.
Pension vs. lump sum payout calculator
Compare the results of a lump sum payout versus a guaranteed monthly payment for life, as well as your annual rate of return if you choose the monthly payment option.
Should I roll my pension over into an IRA?
If your pension plan allows a lump-sum payout option, you could roll it over into an IRA and keep the funds invested. Here’s what to consider:
| Monthly payments | IRA rollover | |
|---|---|---|
| Payment stability | Your monthly benefit payments may be guaranteed for life. In that case, your employer bears the risk of investment performance and longevity | Income is not guaranteed. You manage the investments and bear the risk of market performance. You must ensure your withdrawals are sustainable so you do not outlive your savings. |
| Control | You are subject to the specific rules of the plan, and your decision to start monthly payments is typically permanent. | You have full control over the assets. You can choose from a wide variety of investment options and decide when to take withdrawals (subject to tax laws and required minimum distributions). |
| Beneficiary options |
Options are generally limited. If you are married, plans typically offer a joint and survivor annuity, ensuring your spouse receives at least 50% of your benefit after you pass away. | You have greater flexibility to name multiple beneficiaries, including a spouse, children or others. Your heirs may also have more options for inheriting the assets. |
| Protections | If the company is unable to pay, your benefits are generally protected (up to certain limits) by the Pension Benefit Guaranty Corporation. ERISA-qualified plan assets are also fully protected from creditors. | IRA assets that are rolled over from a pension generally have federal bankruptcy protection, but protection from other creditors outside of bankruptcy depends on state laws. However, IRA assets don't have protection against loss in the market. |
| Fees | Because benefits are defined and guaranteed, plan fees generally do not reduce your payout amount. | You will likely incur investment expenses depending on the products and services you choose to manage your account. |
| Tax impact | Monthly payments are generally taxed as ordinary income and don't provide any flexibility to manage taxes. | An IRA rollover can negatively impact your taxes if you delay your distributions later in retirement. However, an IRA rollover does open the door to tax management strategies such as Roth conversions and QCDs. |
Are my pension payments taxable?
Yes. As with any withdrawals from tax-deferred investments — such as traditional IRAs, 401(k) plans or 403(b) plans — pension payments are taxed by the federal government as income in the year you receive the money. State taxes vary. If you take a lump-sum payout from your pension instead of a monthly payment, you will have to pay the total tax due for the year you receive the money when you file your return. If you roll a lump sum payment into an IRA, taxes will be deferred until you start withdrawing funds.
Understand your pension options
An Ameriprise financial advisor can help you evaluate your pension plan’s payout options and how they can help you reach your retirement goals.
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