By Allison Eatough
In March, the U.S. Department of the Treasury issued a notice that gives current retirees and their beneficiaries a new option for their pensions: a one-time, lump sum payment instead of future annuity payments.
The notice, which essentially allows employers to buy out current retirees from their pensions, reverses a 20151 notice that ended the practice. The change has drawn criticism from advocates for older Americans.
“Often retirees think that if they exchange their pension for a huge chunk of money – sometimes as large as $300,000 or even $400,000 – they can do a better job investing it themselves in the stock market,” Karen Friedman, executive vice president and policy director of the Pension Rights Center, recently told AARP. “But economists warn that rarely, if ever, can people replicate the security of a pension.”
In a March Forbes article2, Norman Stein, a professor at Drexel University, calculated people lose 15 to 20 percent on average when taking the lump sum.
The 2015 notice stems from a Government Accountability Office report3, which found IRS rules around mortality tables and interest rates allowed employers to offer lump sums at a significant discount to the value of the pension. After the report, the Treasury Department said it would write additional rules around these lump sum payments, ending the practice of offering the payments to people who had already retired.
The new notice signifies the current administration will not issue the rules, after all.
The back-and-forth on lump sum rules can leave retirees confused on which option is best, says Brian Kuhn, a financial planner with PSG in Fulton, Md.
Some pension plans already offer lump sums to people who have retired, but even the plans that didn’t can now do so under this new notice, he says.
So, what should current retirees do?
First, don’t panic, Kuhn says. Just because the government issues a new notice doesn’t mean your pension options will change, he says.
“You have different types of employers offering these pensions like the state government, federal government, employers, and then unions, each with its own legal framework, state jurisdictions, and even individual funding levels between plans,” he says. “It’s very difficult to know if one pension has a change to its benefits would that lead to a change for someone else.”
Second, stay informed, he says.
“Pension plans send correspondence to the beneficiary – the person entitled to receive the income or the lump sum one day,” he says. “Whatever the pension does it’s going to have to notify the person who owns the money, so like many financial topics the key is to have direct and ongoing communication with the company that administers the plan. Ask questions, attend conference calls, show the correspondence to a financial advisor.”
Of note: In the new notice4, the Treasury Department said it and the IRS will continue to study the issue of retiree lump-sum windows.
This article was contributed to www.psgclarity.com, a division of Planning Solutions Group, a financial planning firm. If you would like to discuss your financial goals with Brian Kuhn, CFP® the financial planner quoted in this article you may schedule a time using the online scheduler at this website, or calling 301-543-6035 or emailing him at BKuhn@psgplanning.com.
No portion of the content in this article may be construed as investment or tax advice.
Securities offered through Triad Advisors, Member FINRA / SIPC. Advisory Services offered through Planning Solutions Group, LLC. Planning Solutions Group, LLC is not affiliated with Triad Advisors. PSG Clarity is a division of Planning Solutions Group, LLC.