Lump Sum Pension Buyout Offer - Should you accept a pension cash out?

Pension Cash Out Offer – Should I Accept?

The recent rise in interest rates has led to a big increase in companies offering to buy out your pension with a lump sum payment. How do you know when an offer like this is once you should accept? Or, how do you know when you should keep your pension?

Pensions provide a safe, steady source of income for you for as long as you live. These can be great assets to have in retirement and should not be given up without considerable thought.
If the pension payment you would have would be absolutely vital for you to make ends meet in retirement, we would generally caution against taking an offer for a lump sum payment for your pension. While it might be nice to look at a large lump sum payment, there are risks involved in investing and managing that money over time that should be considered.

But it can make sense for some to accept a lump sum payment for their pension. If you have a healthy amount of other fixed income in retirement, from Social Security, annuities, or other pensions for example, then the flexibility of having a lump sum payout and the potential for higher returns can be very beneficial.

Ultimately you need to look at the amount of fixed income that you are comfortable with and that maximizes the success of your financial plan. If this pension is in excess of that amount, it may make sense to accept the lump sum payment.

Lastly, its important to understand your choices in accepting a lump sum payment and any tax consequences.

You have the option of taking this lump sum payment and rolling it into a traditional IRA. This results in no added tax liability for you right now, but it will be taxed whenever you withdrawal that money.

If you want to get the money outside of an IRA, there will be taxes that need to be paid. In general the amount will be taxed at your ordinary income tax rate. This may make sense depending on the size of your pension and if you have little to no other income. But for most, this is not a good idea.

You may also have the option in converting the proceeds into a Roth IRA. This results in taxes now, but the assets will grow tax free in a Roth for the rest of your life. This can be an incredibly beneficial strategy, but takes a lot of planning to ensure a Roth conversion strategy is right for you.

Since you have one chance to make the right decision - If you have an offer for a lump sum payment on your pension, its important to get help analyzing the impact of the choice on your financial plan. Please reach out and schedule a free meeting with us to see how we have helped other like yourself handle this decision.