The Advantages of Lump Sums
- The safety and stability of a monthly pension plan depends in part on the continued health of your company. Most plans are insured by the Pension Benefit Guaranty Corp. However, the PBGC limits the amount of its coverage. If your company should fall on hard times and end up in a bankruptcy court, you could lose a part of your monthly payment that is not covered. However, if you choose to take a lump-sum payment, you avoid this possibility entirely.
- A pension plan is supposed to continue monthly payments for as long as you live. However, these plans generally don’t include money that you can pass on to your heirs. Some exceptions exist, but you generally have to accept a lower monthly payment in return for bequeathing a benefit to your heirs. If you take a lump-sum payout, any money that remains when you die becomes part of the estate you leave.
- The monthly income you get from a pension is limited. If you have experience as an investor, you might be able to get a better return by managing your own money. This is especially true because you can roll over the lump sum into a Roth IRA so that profits won’t be subject to income taxes. If you prefer to have control over your money and want the chance to make more, a lump-sum payout might be your best option.
- Before you decide to take a lump-sum payout, check with a financial adviser to determine whether it is to your advantage. To start with, if your monthly payment is fully covered by the PBGC, you won’t reduce your risk by taking the cash. You also have to take into account market risk if you want to invest the payout money. The possible increase in the size of your estate is a consideration, but you should look at your other assets and assess how much difference the added funds will make.
