Comparing Lump Sum versus Payments

One of the first things you will notice if you are looking at a lump sum payment for your pension is that there are many more options available to you than if you had made payments. For example, you could elect to have your lump sum paid out in payments that coincide with the life cycle of your pension. Another option is to have your lump sum paid out when you reach a certain age. Yet another option is to simply have your lump sum paid once a year. Which would you choose?

Before we answer that question, let’s look at why people make lump sum versus payments for their pension plans. There are several reasons why a person may decide to make payments versus just lump sum. Some people want to ensure that they are getting regular, predictable income each month. Others may want to set aside money for their children’s education and future. Still others may simply be concerned about eroding the value of their pension payments should they choose to Retire. No matter what your reasons, knowing your choices can help you make the best possible decision.

Probably the most common reason that people make lump sum versus payments is so they can keep more of their money. Some employers actually pay workers’ compensation insurance premiums on a monthly basis, leaving them none at all to invest. While this can be convenient for companies and ease the burden on employees, it can also leave workers with less to live on. After all, if you are not making enough money from your job to cover your expenses, how can you expect to live comfortably? If you want the security of knowing that your bills will be paid on time every month, but you don’t want to risk losing your job over an insurance gap, making lump sum payments can give you that peace of mind.

Yet another reason to opt for lump sum versus payments is so you can save as much money as possible. As already stated, this type of pension plan has no guarantee that you will ever be able to draw on the full amount you have contributed. Therefore, if you anticipate a large increase in your pension in the future, it is not a bad idea to build up the account now, rather than waiting until you get that raise or find out you are eligible for a bigger pension. By doing this, you can avoid paying taxes on any amount over the course of your retirement, as well as any additional taxes you are assessed by Social Security upon retirement. In addition, by paying taxes only when they are due, you will be avoiding even more government revenue by not paying the government at all.

Perhaps the most common reason to opt for lump sum versus payments is so that you can prepare for a better future. A universal or defined benefit (DB) pension plans allows you to plan for the future value of your pension. This means that you have a well defined monthly income, regardless of how your investments are performing financially. However, if you do not have any investments yet and expect that they may perform better than your investments currently do, then you will want to make sure you set aside some capital for that purpose.

There are many more reasons to compare lump sum versus payments when determining whether you should invest your money into an employer sponsored pension or plan, or into an IRA with its own benefits and guarantees. Just be sure to do your research. Compare several different companies, and never just go with the first one you come across or are impressed by.