Should you take your pension as a lump sum? #lump #sum #cash


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Should you take your pension as a lump sum?

Pension Rights Center

Updated: August 2015

Some companies have offered to cash out the pensions of certain retirees and former employees and instead give them a one-time lump-sum payment.

While the idea of suddenly having a large sum of money is tempting, this is a decision that you will have to live with for the rest of your life. Anyone who accepts the lump-sum offer will lose the benefits of a lifetime income and will be responsible for taking care of their own investments and making sure the money lasts through retirement.

UPDATE. In July 2015, the IRS and Treasury announced that they would move to prohibit companies from offering lump-sum buyouts to retirees who are already receiving a monthly pension. This is good news for retirees and will help to stop the most harmful of these risk-transfer practices (also known as “derisking”). Lump-sum buyouts can still be offered to former employees who qualified for a pension but who haven’t started getting their benefit yet.

For most retirees, a guaranteed stream of income for life is a better option than a lump sum. The only situations in which a lump sum should be seriously considered are

  • if you are in poor health, you don’t expect to live long, and you will not have a surviving spouse who will need lifetime income; or
  • if you already have a substantial nest egg or other secure source of adequate income, such as a spouse’s pension.

Here are some questions to consider:

  • Could I or my spouse live longer than average? Your lump sum is calculated based on average life expectancies. If you or your spouse lives longer than expected, your lump sum won’t be enough.
  • Can I afford to lose some or all of the money? If you take a lump sum, no one is responsible for taking care of you except you. If you are wealthy enough that you don’t need your monthly pension or if your spouse has a large pension, you have greater flexibility to consider taking the lump sum.
  • How good are my investing skills? How good are my spouse’s investing skills? If you already own stocks and bonds, look at your past investing history. Can you earn enough through investments to make the lump sum grow and last throughout your retirement years? Bear in mind that retirees generally invest much more conservatively than younger workers, and, therefore, have lower investment returns. Also, if you take a lump sum and then die, it will be up to your spouse to make the money last through his or her lifetime.
Differences Between Lifetime Payments and a Lump Sum

Yes, if I chose a
survivor benefit for my
spouse or ex-spouse.

Yes, if there is money left when you die

*Subject to certain limits. Payments from your pension plan are backed by your employer
and the Pension Benefit Guaranty Corporation. If your annuity comes from an insurance
company, those payments are guaranteed by the insurance company and are backed by
state insurance funds.

  • What are the tax implications of the lump sum? If you take the lump sum and don’t roll it over directly into an IRA, the lump sum will be counted as income for the year. Depending on how much money it is, that might push you into a higher tax bracket.
  • How large is my current pension benefit? If your pension is paid by your former employer and that employer goes bankrupt, the Pension Benefit Guaranty Corporation (PBGC), the federal pension insurance agency, might take over your pension. The PBGC has limits on the benefits that it can pay, so your monthly benefit might be reduced. However, the vast majority of retirees who get their benefits from the PBGC receive the same amount that they were getting before the PBGC took over their plan.

If your annuity comes from a private insurance company, in the unlikely event that the insurance company goes under, your benefits will be guaranteed up to certain limits by insurance industry state guaranty associations. These limits vary depending on where you live. (See our related fact sheet, What Happens When a Pension is Transferred to an Insurance Company? )

  • Will I change my mind? If you take a lump sum and decide later that you want to use the money to purchase an annuity from an insurance company, you should know that individual annuities typically are very expensive, and you will likely get a lower monthly payment than if you had stayed with the annuity purchased by the plan. To see how much of an annuity you might be able to purchase with your lump sum, check out an annuity calculator, such as ImmediateAnnuities.com.

Individual annuities are expensive, particularly for women, because they are charged even more for annuities on the assumption that, as a group, women have a longer life expectancy. Women do not face such discrimination when getting a traditional pension or an annuity that was purchased by the pension plan.

While most employers did not offer lump sums to active workers, workers who are not yet retired should know that the value of their lump sums will depend on interest rates when they retire. Also, if you have earned the right to receive special early retirement benefits or subsidized survivor benefits, you could lose these subsidies if you take a lump sum.

  1. Unless you have other sources of income, don’t be tempted to take a lump sum for non-retirement purposes. such as paying off debt, paying for everyday expenses, or helping out family or friends.
  2. Check into the financial interests of anyone advising one option over another. For example, a financial adviser might urge an individual to take a lump sum because the adviser will get fees from managing the money or commissions for selling you certain products. These fees and commissions will lower your rate of return.
  3. Some retirees have expressed concern about the long-term stability of an annuity provider, whether it is an insurance company or the Pension Benefit Guaranty Corporation. For most people, the risks posed by taking a lump sum still outweigh the remote possibility that an established financial institution or the PBGC will not be able to continue to make payments .
  4. Make sure that your employer has the correct information regarding your age, salary, dates of employment, and any spousal or other benefit you have chosen.
  5. Make sure that your employer gives you all of the information that you need to make an informed decision. A Government Accountability Office study published in February 2015 found that lump-sum offer packages routinely lack key pieces of information that the recipient should have, such as the formula used to calculate the lump sum.
  6. If you think your benefit has been calculated incorrectly, you might be able to get assistance from one of the U.S. Administration on Aging’s pension counseling and information projects. which provide free legal counseling (not financial advice) in 30 states.

Your Guaranteed Pension (Pension Benefit Guaranty Corporation)

Maximum Monthly Guarantees (Pension Benefit Guaranty Corporation)

Companies that are offering lump-sum pension buyouts – See more at: http://www.pensionrights.org/publications/fact-sheet/companies-are-offering-lump-sum-pension-buyouts#sthash.wJuFKTAC.dpuf

Companies that are offering lump-sum pension buyouts – See more at: http://www.pensionrights.org/publications/fact-sheet/companies-are-offering-lump-sum-pension-buyouts#sthash.wJuFKTAC.dpuf

8 Questions to Ask Before Taking a Pension Lump Sum Offer (Forbes) This article summarizes the information that your employer should provide to you when making a lump-sum offer.


Should I take a lump-sum payout or monthly payments? Ultimate Guide to Retirement, lump sum or payments.#Lump #sum #or #payments


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Should I take a lump-sum payout or monthly payments?

Sorry to do this to you, but the best answer is: It depends.

Steady payments: Most people choose a monthly payout, also known as a life annuity. Having that steady income can make for less stress than taking a big lump sum, especially if you aren’t an experienced investor.

Lump sum: If you take a lump sum, you must assume responsibility for how the money is invested and how much you can afford to spend each month. One danger with a lump sum is that you may be tempted to spend too much today, leaving you short of money down the line. By choosing a steady monthly payout, you’ll avoid the temptation to run through your pension stash.

But there are other factors to consider, too. For more see What are the advantages of taking a lump sum?

Lump sum or payments

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Annuity lump sum payment #annuity #lump #sum #payment


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UFPLS: lump sums from your pension

Uncrystallised Funds Pension Lump Sum

Important. The information on our website is not personal advice but we can offer advice if specifically requested. What you do with your pension is an important decision, which could be irreversible. Taking a lump sum is a higher risk option than an annuity. Make sure you understand your options and check they are suitable for your circumstances: take appropriate advice or guidance if you are unsure. The Government’s free Pension Wise service can help. It provides impartial guidance face-to-face, online or by phone – more on Pension Wise .

What is a lump sum withdrawal?

The pension freedoms introduced in April 2015 mean investors can take lump sums directly from their fund, from age 55. This is also known as taking an Uncrystallised Funds Pension Lump Sum (UFPLS).

Each time you take an UFPLS from your pension, 25% will be tax free and the rest taxed as income. If you have reached 75 and have insufficient lifetime allowance the tax free percentage will be lower.

The example pie-chart illustrates how a £25,000 income payment can be withdrawn and taxed via an UFPLS. More detailed information about tax treatment can be found below.

Why take lump sums?

There is no requirement to take a pension all in one go. Deciding whether to withdraw your income over time rather than in one go is an important consideration, and can affect the amount of tax you pay.

Those who don’t need their full tax-free cash yet, nor a regular income from their pension, may wish to take periodic lump sums out as they wish.

The remaining pension stays invested, which means the fund value and future income is not secure. Keeping the fund invested does create the potential for growth but taking lump sums out will reduce what is left to provide income in future, particularly if your investments perform badly or you take too much out. There are tax advantages in keeping funds within a pension, and the fund usually stays outside your estate for inheritance tax purposes.

These figures are an estimate only, and assume the whole payment falls within one tax band. They do not take into account the effect on any means tested benefits (e.g. child benefit) or any other impacts such as personal allowance or the nil-rate savings band.

What happens to my pension when I die?

If you die before age 75 any funds remaining in your SIPP can be paid to your beneficiaries, tax free in most cases. For death on or after 75 any benefits paid out will be taxed as income at your beneficiary’s marginal rate.

Anything else to consider?

  • Ensure you fully understand your options. UFPLS via the Vantage SIPP is offered without personal advice as standard. If you are at all uncertain about its suitability for your circumstances, we strongly suggest you contact us for advice. You should carefully consider your overall financial circumstances and other retirement goals or plans when making your decision. Remember, Pension Wise the government’s free impartial service is available to help you understand your options.
  • Consider the charges you might pay. Most investments carry charges, and the income you ultimately receive depends on the returns from investments, less any charges. Therefore it is important you consider the charges of your pension plan as well as those of any of the other options you are considering. See the charges of the Vantage SIPP .
  • Investment scams do exist. Once money is drawn from a pension, you should be careful where you re-invest it. These scams tend to be carried out by firms which are not regulated and warning signs include cold calling or texting, the promise of unique or unusual opportunities offering quick, easy profits or something which seems too good to be true. You can find out more at www.scamsmart.fca.org.uk
  • Drawdown versus Uncrystallised Funds Pension Lump Sum (UFPLS)

    Why might you consider this option?

    • You wish to receive your tax-free cash in stages, or to withdraw your entire pension in one go.
    • You want the option to draw a variable income of your choice.
    • You want the potential to increase any remaining pension through investment growth but are comfortable the pension is invested so future income is not secure and could fall, or even run out.
    • You want to receive your tax-free cash as a lump sum.
    • You want the option to draw a variable income of your choice.
    • You want the potential to increase any remaining pension through investment growth but are comfortable the pension is invested so future income is not secure and could fall, or even run out.

    Do I have to use my whole pension?

    No – you can take lumps sums as and when you require income.

    No – you can move funds into drawdown in stages (known as partial or phased drawdown).

    What decisions do I need to make at the start?

    • How much you wish to withdraw. Usually 25% of each withdrawal is tax free, the rest is taxable.
    • Where to invest your remaining pension.
    • How much of your pension you want to move into drawdown (usually up to 25% of this amount can be taken as a tax-free lump sum up front).
    • Where to invest your pension.
    • How much (if any) taxable income you wish to take.

    How will income be taxed?

    Usually 75% of each lump sum will be subject to Pay As You Earn (PAYE) income tax.

    When you decide to take income from your drawdown funds, each payment will be subject to Pay As You Earn (PAYE) income tax.

    Will future contributions be restricted?

    Flexibly accessing benefits via an UFPLS or drawdown can affect your future pension contributions by triggering the money purchase annual allowance (MPAA). Once triggered, contributions into SIPPs and other money purchase pensions will be restricted (to £4,000 per tax year). This will be triggered:

    • As soon as your first UFPLS is taken.
    • Once your first income payment is taken. Just taking the tax-free cash will not trigger the MPAA.

    What happens to the pension when I die?

    If you die before age 75 any remaining funds can be paid to your nominated beneficiaries, tax free in most circumstances. If you die at or after age 75 income paid to your beneficiaries will be taxed at their rate of income tax.

    The information on our website is not personal advice but we can offer advice if specifically requested. What you do with your pension is an important decision, which could be irreversible. Taking an income via drawdown or as a lump sum is a higher risk option than an annuity. Make sure you understand your options and check they are suitable for your circumstances: take appropriate advice or guidance if you are unsure. The Government’s free Pension Wise service can help. It provides impartial guidance face-to-face, online or by phone – more on Pension Wise.

    The value of investments can go down in value as well as up, so you could get back less than you invest. It is therefore important that you understand the risks and commitments . This website aims to provide information to help you make your own informed decisions. It does not provide personal advice based on your circumstances. If you are unsure of how suitable an investment is for you, please seek personal advice from our Financial Advisers.