How Does De-Risking Change How I Take My Pension Plan Payments?

How Does De-Risking Change How I Take My Pension Plan Payments?

August 12, 2019

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By Jeremy Reif, CRPS®, Financial Advisor and Owner of Point Wealth Management

If you have a pension plan with a large employer, you may know the basics of the fine print, such as when you are eligible to receive payments and the options for how you receive your money. But there’s one thing that impacts your pension in a significant way, something you need to understand so you can make the best decisions for your assets. That one thing is called “de-risking.”

De-Risking Defined

De-risking is when a large employer hands over its established pension liabilities to a third party, typically a major insurer. They do this to offload a sizable financial obligation. Pension plans are expensive to maintain, and fewer companies are offering defined-benefit plans that guarantee a monthly income for however long their former employee lives in retirement. 

Companies that opt for the de-risking solution usually ask pension plan participants if they want their pension money all at once rather than incrementally in an ongoing income stream, otherwise known as a pension plan buyout. 

The de-risking trend began in 2012. In that year, Ford Motor Co. and General Motors gave their retirees and ex-employees a new option: they could take their pensions as lump sums rather than periodic payments. Other corporations took notice of this and began offering their pension plan participants the same choice.

Three years later, the Department of the Treasury released guidance effectively prohibiting lump-sum offers to retirees already receiving their pensions. Lump-sum offers were still available for employees about to retire. In March 2019, though, the Department of the Treasury reversed course and issued a notice that permitted these offers to retirees again. (1)

What Should I Do?

Now you know the history and reasons for that lump-sum offer sitting in front of you, but you may still be wondering what decision is right for you. This choice will not be easy and will require you to evaluate many variables in your finances and your life circumstances. You can’t skip this step, because whatever choice you make will likely be irrevocable. (2)

The Case Against Lump-Sum Payments

What is the case for rejecting a lump-sum offer? It all comes down to three important words: lifetime income stream. Do you really want to turn down scheduled pension payments that could go on for decades? You could certainly plan to create an income stream from the lump sum you receive, but if you are already in line for one, you may not want to make the extra effort. 

You could spend 20, 30, or even 40 years in retirement. An income stream intended to last as long as you do sounds pretty nice, right? If you are risk-averse and healthy, turning down decades of consistent income may have little appeal, especially if you are single or your spouse or partner has little in the way of assets. 

Also, maybe you are content with the way things are going. You may not want the responsibility that goes with reinvesting a huge sum of money. 

The Case For Lump-Sum Payments

It seems easier to just stick with a traditional long-term payment plan. Why would you want to take a lump-sum amount and deal with the hassle? The answer usually has something to do with time. If you are retiring with serious health issues, for example, you may want to claim more of your pension dollars now rather than later. 

Or it may be a matter of timing. If you need to boost your retirement savings, a lump sum may give you an immediate opportunity to do so. Maybe you would like to invest your pension money now, so it can potentially grow and compound for more years before being distributed. (As a reminder, pension payments are seldom adjusted for inflation.) Maybe your spouse receives significant pension income, or you are so affluent that pension income would be nice but not necessary. If that’s the case for you, perhaps you want a lump-sum payout to help you pursue a financial goal. You also might be worried that a pension income stream would put you in a higher tax bracket.

Making The Best Choice

Regardless of which option you choose, it would be prudent to work through the details and variables with a financial professional. For example, if you decide to take a lump sum, you want to be sure to take it in a way that minimizes your tax exposure. Suppose your employer just writes you a check for the amount of the lump sum (minus any amount withheld) and you direct that money into a taxable account. If you do that, you will owe income tax on the entire amount. Instead, you could have the lump sum transferred into a tax-deferred investment account, such as an IRA. That would give those invested assets the potential to grow, with income taxes deferred until withdrawals are made. If you stick with the ongoing monthly payments, an advisor can help you make sure you will have enough to live on in retirement. 

If you believe a lump-sum payment is in your best interest, a professional may be able to help you manage the money in recognition of your financial objectives, your risk tolerance, and your estate and income taxes. 

We’re Here To Help

At Point Wealth Management, pensions are one of our specialties. The CRPS® after my name stands for Chartered Retirement Plans Specialist. This puts me in a position of hearing and answering some of the most common pension questions on a regular basis. If you have questions of your own and need some unbiased guidance, I am here to help and point you in the right direction. Schedule a call and meet me virtually and get started on your retirement plan today. 

About Jeremy Reif, CRPS®

Jeremy Reif is an independent financial advisor with more than a decade of experience in the financial services industry. He is also the owner of Point Wealth, LLC, an independent financial planning and investment management firm. With advanced credentials and training in retirement planning and financial planning, Jeremy focuses on helping individuals and families pursue financial independence. Regardless of the services he’s providing, he focuses on talking openly about financial planning, the industry, common questions about retirement planning, and more to help everyday investors gain more confidence in their financial opportunities. Based in Wausau, Wisconsin, Jeremy serves clients throughout the state and can work virtually with clients throughout the country. To learn more, visit http://pointwealthmanagement.com and connect with Jeremy on LinkedIn.

Investment Advisory Services offered through Retirement Wealth Advisors, Inc. an SEC Registered Investment Advisor 

Securities offered through World Equity Group, Inc. member FINRA and SIPC, a Registered Investment Adviser 

Point Wealth Management, Retirement Wealth Advisors, Inc. are separate entities and are not owned or controlled by World Equity Group, Inc. 

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss. 

The opinions expressed by Jeremy Reif are not necessarily those of Retirement Wealth Advisors, Inc. or World Equity Group, Inc. and are subject to change.

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(1) https://www.cnn.com/2019/03/20/economy/lump-sum-pensions-retirement/index.html

(2) https://www.fool.com/retirement/2018/06/18/lump-sum-or-annuity-how-to-make-the-right-pension.aspx

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