Although company pensions are going the way of the dinosaur, you may still be in a position to choose between taking a lump sum or a monthly stream of income from your pension.
Deciding between these two is not always straightforward. There are many factors that go into determining which may be better for you. I have an opinion that the lump sum has some hidden advantages that many overlook.
The first is flexibility. Once you have received a lump sum, you can decide where each and every dollar is allocated among your priorities of liquidity, income, meeting financial goals, protecting against premature death, long-term care risk, and opportunities for growth. The pension option, by contrast, allocates every single dollar to your need for income. I appreciate having the flexibility to choose rather than having it decided for me.
The second is tax planning. Once I receive a lump sum, I can determine each and every year how much is withdrawn, or not withdrawn as a taxable distribution. This puts me in the driver’s seat of tax planning in order to make sure that each and every dollar is taxed at the lowest possible rate. If I take the lump sum, I can’t choose how much taxable income I receive each year, and, most importantly, I can’t protect this annual income from negatively taxing my Social Security.
The third is greater control of the account balance if I do want lifetime income. I can always take a lump sum and put it into a “personal pension” for guaranteed lifetime income. I can decide whether to put 100% in, or a smaller amount if I don’t need that much. Most importantly, I control the account balance and it belongs to me. If both spouses have passed away earlier in retirement than expected, I may still have a residual account balance from the “personal pension” that I can pass on. With the monthly pension, there is little to nothing to pass on after the last spouse passes.
Did you have the opportunity to choose between a lump sum or a pension?