Should Clients Select Lump-Sum Pension Payments?

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Neal Angel

Is your client about to take a gold watch and call it a day, retiring after 40 years? Did their employer dangle several appealing options regarding pension benefits?


Don’t let your client make a move until you’ve carefully considered the issues and implications of each option. You may find better ways for your client to realize pension benefits.

Should a client decide to take the lifetime-pension option, they now must choose between one of several payout options. If they are single, the choice is simple. Take the single-life payout option in order to secure the highest monthly lifetime income.

But if your client is married, it gets more complicated. Should they take the highest payout that ends at death with no residual pension benefit for the spouse? With this option, your client’s spouse could be left out in the cold with nothing.

If, on the other hand, your client chooses the option that provides 100% survivor benefit, they sacrifice a large chunk of their monthly pension check. And here’s another potential problem that you may not have considered; your client may not die first. If your client’s spouse passes away before your client does, and your client has chosen the lowest payout with 100% survivorship, your client has now sacrificed an added pension benefit.

Sadly, there are no “do-overs” after these decisions are made.

Just when you thought things were getting complicated, the employer throws another curve ball. Instead of a lifetime-pension benefit, they offer a lump sum of money instead. This has become increasingly popular with companies for reasons I’ll discuss later. Should your client take the money? Or should they take the monthly paycheck for life?

Let’s break down the issues and bring a little clarity to the options.

Survivorship options

First, let’s consider the survivorship options and see if there are some alternatives available to your clients. Quite often, there are more survivorship options given by employers than the ones mentioned here, but we’ll confine ourselves to these basic options for simplicity’s sake. Assume the employer has offered the single-life with zero-survivorship option. Taking the single-life option ensures the highest payout while clients are living, but nothing for spouses at death. On the other hand, a limited (25-75%) or full (100%) survivorship option means potentially sacrificing a significant amount of monthly income. This sacrifice will be in vain if a client’s spouse dies first.