Updated Saturday, April 19, 2014 as of 1:08 PM ET
Practice - Practice Management
Weighing a Pension Payout
by: George Yacik
Friday, February 1, 2013
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"The only scenario where it might make sense to leave it with the company would be if you had a situation where giving it to the person would create a problem if they had that money in their hands," Marsden adds. "They may start to make some bad decisions. Don't give them a chance to make those decisions."

Another situation when it would be better to stay invested in the pension plan is if the person's health insurance benefits are tied to remaining in the plan, Marsden says. But those instances are rare, he says.

In addition to lump-sum payments, some companies are offering former employees the option of collecting their pensions at an earlier age, say 55, albeit at a sharply reduced monthly payout. While it may be attractive to some people to collect a little extra money each month, the decision may have negative tax consequences. If the client and the spouse are both still working, that extra income could push them into a higher tax bracket, Johnson warns.

"More income usually means more tax," she says. "So you would then be hit with a double whammy: a higher tax on a lower [pension] payment. But if you're retired, you're likelier to be in a lower tax bracket. So it may behoove you to wait."

Still, she notes, the tax bite may vary at the state level. Many states exempt retirement income from taxation, although they vary in what kinds of income are exempt and the age of the taxpayer they apply to.

 

 

George Yacik, a financial writer in Stratford, Conn., is a former editor at American Banker and The Bond Buyer.

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(2) Comments
I disagree that the lump sum benefit is the best option for "most" people. I depends on the payout rates. The last client I just met will get an effective payout rate of about 9% with the single life option (she is single & doesn't care about passing on assets). Where else could she duplicate that?
Posted by Gary D | Saturday, December 21 2013 at 3:14PM ET
I also disagree with many aspects of this article. It strikes me as self-serving for the adviser to take this approach, rather than look at each situation separately. There are so many flaws in the article I can't even begin to address them here.....
Posted by David H | Saturday, December 21 2013 at 4:26PM ET
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