Elliot Raphaelson

Elliot Raphaelson

In March, the United States Treasury Department issued a ruling allowing corporations to buy their way out of pension obligations with lump-sum payments to retirees.

This backtracked on a pledge by the Obama administration to outlaw the practice. In 2015, Treasury and IRS issued guidance effectively banning lump-sum buyouts for retirees already receiving pension payments (although it permitted such buyouts for employees on the cusp of retirement).

The reason the government originally intended to ban the buyouts is that they often favor employers over retirees. Those already receiving a pension are not obliged to take the buyout, but many are tempted by what appears to be a large lump sum.

The fear is that retirees will be tempted to use the lump sum to buy big-ticket items or pay down debt, depleting the resources available to them later in life. Even if they exercise exemplary self-control, retirees who take the lump sum typically find it challenging to match their pension benefits in the financial markets.

Companies often offer a lump sum and one or more options for lifetime income — an annuity. Employees and retirees should look carefully at the options presented before making a decision.

For some, the lump sum will be attractive. For example, an employee with serious health issues should seriously consider taking the lump sum, especially if there is no survivor option to the pension plan or annuity.

Whatever his or her situation, the employee or retiree presented with such offers should consider consulting a fee-based certified financial planner before making any decision. For employees in good health, I recommend contacting an agent or adviser that represents numerous carriers for some quotes for a single-premium immediate annuity (SPIA) and/or a joint SPIA covering the employee and his/her spouse. For example, if the employer is providing a survivor option, then it would make sense to request two quotes from the annuity company, one for only the employee and a joint one for both spouses.

When you ask for a quote from an agent, the lifetime annuity you will be offered will be primarily based on your life expectancy at the time you purchase the annuity (as well as the life expectancy of your spouse if you select a joint policy). Interest rates at the time are a secondary issue.

If you purchase an SPIA, you have many options. You can select a structure that guarantees a lifetime income stream while ensuring that any unused premium would go to the beneficiaries you select. So even if you decide not to purchase a joint annuity, you can ensure that even if you die before recovering 100 percent of the premium you paid, your spouse or another beneficiary would still receive payments until all of the premiums you paid initially has been repaid to either you or your beneficiaries. Even if you select this option, the insurance company still has to provide you an income stream for as long as you live.

Naturally, selecting additional options will have an impact on the amount of guaranteed monthly income the insurance company will offer.

Again, I recommend using a fee-based certified financial planner to help decide between options. You can also seek the advice of a reputable insurance agent who specializes in annuities. As I have mentioned before, I have worked with annuity expert Stan Haithcock (stantheannuityman.com) for many years. Upon request, he will provide, at no cost or obligation, his SPIA "Owner's Manual" (as well as information about other types of annuities) which discusses various options with pros and cons.

Make sure any adviser or agent you consult recommends only insurance companies with the highest financial ratings and presents cost-effective alternatives.

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Elliot Raphaelson welcomes your questions and comments at raphelliot@gmail.com.


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