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Why a Lump Sum Pension is More Beneficial than You Think

Why a Lump Sum Pension is More Beneficial than You Think

| May 01, 2019
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As more private companies turn away from traditional defined benefit plans, the prevalence of employer-matched 401(k) plans is increasingly becoming an option for corporations and so is the lump sum pension.

With 401(k) plans offering less management and cheaper options to administer than defined benefit plans, more private employers are increasing their use of the plans. With greater power to manage financial decisions coming from 401(k)s, employees are responsible for deciding between lump sum pension benefits or monthly payments.

Influences affecting defined benefit plans

As businesses look to cuts costs any way they can, defined benefit plans are often one of the first victims of such cost-cutting moves.

Lowering the rate and risk associated with a defined benefit plan as led companies to find cheaper alternatives while still providing employees with retirement packages.

With corporations charged with financing the defined benefit plan, as well as their performance, companies are left footing the bill when investments take a dive during financial hardships. Maintaining the plan’s funding while also meeting future pension commitments can become burdensome for the sponsor.

Moreover, being required to consistently fund private pension plans along with the legal risk of faulting on the plan makes numerous companies hesitant to continue accepting high-risk benefits. As life expectancy increases and more people live longer, retirement benefit sponsors can also end up paying employee pensions for decades.

Credit: Bankrate Financial Security Index, Feb. 28-March 4

Lump sum pension benefits

While receiving monthly payments during retirement offers some financial security, using lump sum pension benefits also has other advantages including flexibility, growth, tax benefits and inheritance ability:

  • Complete control: Lump sums allow the employee to control their funds instead of the employer
  • Stability: A company’s financial soundness is mitigated with a lump sum
  • Tax obligations: Investors can better control their tax liability
  • Family benefits: Employees can easily transfer their remaining funds to heirs after death

By rolling your lump sum into an IRA, employees funds are protected from potential risk in pension benefits if another financial crisis strikes. The IRA plan will also permit more freedom to determine the size, occurrence and starting date of future withdraws.

Why monthly payments can be flawed

Taking a lump sum payment immediately gives you complete control of your retirement savings while monthly payments come with additional risks.

Although monthly payments seem more stable for people lacking financial discipline, if a plan member dies before retirement or soon after payments start in retirement, funds can be lost.

Having a lump sum may seem like a daunting task to properly manage but speaking with a Certified Financial Planner allows you to better control of your retirement assets to take advantage of the flexible choices at your disposal.

Credit: U.S. Bureau of Labor Statistics

Taking the lump sum

Upon taking the lump sum payment, the employee can feel overwhelmed with such a large influx of cash that they now must manage. For investors with less experience, working with a Certified Financial Planner offers various benefits:

  • Effective plans: Certified Financial Planners can set financial goals and help you manage assets to ensure you stay on track
  • Prepare: Planning for a secure retirement is more attainable when you have professional help along the way
  • Tax savings: Professional financial managers help control your tax liability

Before deciding on when to take a lump sum payment, the imbursement is not only based on the employee’s years of service and earning history, but by the market’s interest rates at the time. Knowing the market and how interest rates are fluctuating is vital before deciding retirement plans.

With more employers announcing shifts from defined pension plans to 401(k) plans, it’s imperative to start researching how and when your payments will be distributed. By working with a financial manager whose expertise in the field can help alleviate bad decisions, you’ll can rest assured that your financial retirement will be working for you. If you need help with your pension or other retirement plans, reach out to Matt Logan at 336-540-9700.

Matt Logan is a Representative with Matt Logan Inc and Summit Brokerage and may be reached at, 336-540-9700 or [email protected].  

Matt Logan Inc. is an independent firm with Securities offered through Summit Brokerage Services, Inc., Member FINRASIPC. Advisory services offered through Summit Financial Group Inc., a Registered Investment Advisor. Summit Brokerage Services, Inc., its affiliates and Matt Logan Inc. do not give tax or legal advice. You should consult an experienced professional regarding the tax consequences of a specific transaction. These are the views of Matt Logan Inc, and not necessarily those of Summit Brokerage Services, Inc. and any of its affiliates and should not be construed as investment advice.

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