Comparing Lump Sum versus Monthly Payments
When most people hear the term ” Lump Sum” they automatically think of retirement pensions. However, that is only one example of a structured settlement payment. In fact, there are many different kinds of settlements and each has their own characteristics which you should be aware of before deciding which type is best for you. It is important to first decide what your exact goals are in terms of a lump sum payment versus payments made monthly.
The goal of lump sum versus payments is not to determine who is better off, the pensioner or the company that sold the annuity or insurance plan. The goal is simply to help you understand the difference between the two payment options. There are two primary types of structured settlements: a monthly payment and a lump sum payment. Let’s take a closer look at these two payment options so that you can make an informed decision about which type is best for you.
One of the first things you should know is that when you receive a lump sum payment, you never have to pay taxes on it. This is unlike a pension plan which has to be paid taxes on the payments. Your lump sum will never have to come out of your pocket. There are also some situations where a pension plan’s tax-free status can offset some or all of your future pension payments, depending on your income, expenses and pension coverage requirements.
Another thing you should know is that lump sum versus payments can vary from state to state. For example, some states have a lower tax rate on lump sum payments than on pension plans. You should check with a qualified accountant to find out what kind of tax bracket you fall into in your particular state and then look at the company’s proposed benefits in light of your stated earning potential. Some employers will offer a larger lump sum payment if the worker’s compensation claim is high; for example, a company may propose to give its employee a $1 million plan if that person is guaranteed a settlement.
When you compare lump sum versus payments, it is also important to consider your age, health and the number of years you expect to work. You should use the same form you would use for comparing traditional retirement plans. However, you must be careful to read this form carefully and not to include any information that is not significant. Any items listed that are not pertinent to the job you are applying for must be omitted. If you are not eligible for the proposed pension, your employer may provide you with a payment plan that is based on salary and/or longevity.
If you are starting over after being laid off or having an early retirement age, you should probably consider a combination of a pension and a lump sum payment. With a pension, your future income can be influenced by your pension plan’s investment returns; however, the money is not taxable until you begin receiving it. In contrast, a lump sum payment represents a one-time payment. Also, you must be aware of all applicable federal and state taxes. Also, make sure that you are comparing apples-to-apples when comparing lump sum payment versus monthly payments.