Pension lump sum or annuitization

June 22, 2016 by Katelyn Rattray

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About the author

Katelyn Rattray

Senior content marketing specialist

With a background in content marketing, public relations, and social media management in a variety of industries, Katelyn strives to deliver high-quality educational content to advisors in the financial services industry and empower them with tools to boost their marketing efforts through content marketing and technology.

There are many things to consider when deciding whether to annuitize a pension or take a lump sum. It is important to understand your clients fixed expense landscape. The higher their expenses, the more income they will need to cover those expenses. A pension will provide a reliable stream of income to help cover this need and makes the most sense for these individuals. This assumes that the pension fund is in good health.

Longevity is a very important component of this decision as well. The earlier the recipient passes, the less benefits they will receive. It is important to have the conversation with your clients as to their health status. Without this information, a suitable recommendation is not possible. If the client is in poor health, a lump  sum may be the best option.

Inflation is another important consideration. If the pension plan does not have an inflation adjustment built in, then the income stream will degrade over time, lowering your client’s purchasing power.

The client’s time horizon for triggering the pension income stream is also important. If a client is five to ten years from retirement, a lump sum might make the most sense. A pension, by nature, does not provide for diversification. Therefore, the client gives up potential growth in return for taking a stream of income at a future date.

Finally, it is important to review your client’s tax situation as pension income is taxed at ordinary income tax rates. NaviPlan’s robust tax calculation engine is the most powerful in the industry. In addition to providing advisors with the most accurate projections, one can use NaviPlan’s Scenario Manager to model these various considerations to help make the most appropriate recommendations for their clients. NaviPlan’s retirement cash flow report pages can help the advisor justify their recommendations.

At the end of the day, you do not get a second chance with pension elections so this decision is a very important with respect to your client’s retirement income landscape.