Employees entitled to a pension from a former employer may soon receive letters offering them a lump sum payout. New rules that take full effect next year allow plan administrators to offer smaller lump sum payouts to vested former employees, and even pension programs that have not offered lump sums in the past may amend their plans to take advantage of the new rules. If you’re faced with deciding whether to take a lump sum, take your time. Once you’ve made up your mind, there’s no going back. Even if you are presented with a lump sum offer, a monthly annuity payable at your normal retirement age is always an option, says Rebecca Davis, of the Pension Rights Center, in Washington, D.C., and with an annuity you won’t have to worry about how to invest your money or whether you will outlive your savings.
Both Vanguard and Fidelity Investments are gearing up for the potential onslaught of pension-payout offers by offering free help to participants in the plans they administer. Vanguard’s new Pension Reinvestment Services offers participants free phone access to certified financial planners, who do not receive commission on products they recommend, to guide them through their choices and explain the consequences of their decisions. For example, if you decide to forgo a monthly pension benefit, you may roll over the lump sum to an IRA or to your current employer’s 401(k) plan with no immediate tax consequences. Future withdrawals will be taxed at your ordinary income tax rates.
Fidelity’s new Collect Your Pension service includes online educational materials, a video on how to take a pension payout, and links to pension calculators and a retirement income planning tool. Gerald Foster of Seattle, Wash., used Fidelity’s new service to decide how to collect his pension and to complete all the paperwork. Foster, 59, chose a partial lump sum distribution. But before he could collect, he had to supply a divorce decree to prove he did not have a spouse entitled to pension benefits.
Married employees are always offered the choice of an annuity based solely on their own life or an annuity with a smaller monthly benefit that continues paying until the second spouse dies. “It might make sense for a married couple to choose the single-life benefit and to purchase life insurance to provide for the surviving spouse tax-free,” says Robert Russell, a retirement income specialist and president of Russell & Co., a financial-planning firm in Fairborn, Ohio. That’s just one example of the questions you need to ask a financial adviser before you sign off on a pension payout.
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