First, you should ask yourself why your company would even want to cash you out of your pension plan. Employers have various reasons for offering the lump sum payment.
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They may use it as an incentive for older, higher-cost workers to retire early. Or they may make the offer because eliminating pension payments generates accounting gains that boost corporate income. Furthermore, if you take the lump sum, your company will not have to pay the administrative expenses and insurance premiums on your plan. Before choosing one option or the other, it helps to keep in mind how companies determine the amount of lump sum payouts. From an actuarial standpoint, the typical recipient would receive approximately the same amount of money whether he chose a pension or a lump sum.
The pension administrator calculates the average lifespan of retirees and adjusts the payment schedule accordingly. That means if you enjoy a longer-than-average life, you will end up ahead if you take the lifetime payments.
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But if longevity is not on your side, the opposite is true. Those with a serious illness, for example, have a powerful reason to take the lump sum. One approach might be to have it both ways: Put part of a lump sum into a fixed annuity , which provides a lifetime stream of income, and invest the remainder.
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Lump sum payments give you more control over your money, allowing you the flexibility of spending it or investing it when and how you see fit. It is not uncommon for people who take a lump sum to outlive the payment, while pension payments continue until death.
If a pension administrator goes bankrupt, pension payments could stop, though PBGC insurance covers most people. Compare Investment Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Benefit available to the spouses or common-law partners of Guaranteed Income Supplement recipients.
Information on Employment Insurance EI , pensions, benefits and taxes, for those who work or live outside of Canada. Help you plan for retirement, including where your retirement income may come from, and what benefits you may be eligible for when you retire. Find out how to receive a benefit if you are a low-income widow and are not yet eligible for Old Age Security. You will not receive a reply.
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Skip to main content Skip to "About government". Public pensions Information on the Canada Pension Plan, Old Age Security pension and related benefits, the Canadian retirement income calculator and retirement planning. Canada Pension Plan retirement pension Eligibility criteria, deciding when to take your pension, how to apply online and amounts. Canada Pension Plan disability benefits A taxable benefit you may be eligible for if you are unable to work because of a disability.
Old Age Security pension A pension you can receive if you are 65 years of age or older and have lived in Canada for at least 10 years - even if you have never worked.
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Pensions are also expensive to maintain. The premiums the PBGC charges per covered employee have more than doubled over the past decade as part of a budget gimmick to fill other government revenue holes.
Federal law gives employers an out. Companies can offload their pension obligations to the private sector by purchasing an annuity plan for each retiree from an insurance company. Or, for an even cheaper option, they can offer their employees a lump sum up front according to a formula that approximates how much a retiree would receive if they lived an average number of years.
In the insurance world, this strategy is known as "de-risking," because it transfers pension risk from the company's balance sheet to an insurance company and to retirees. The lump-sum option became particularly popular starting in , when changes enacted in a law that made them more financially appealing took full effect. Ford and General Motors pioneered the practice of offering buyouts to their tens of thousands of current retirees, rather than just those on the cusp of retirement. The insurance firm Willis Towers Watson estimated that about businesses, including big companies like Sears and JCPenney, offered lump sum buyouts that year.
Why ageism hurts men more than women. For retirees, taking a lump sum is entirely voluntary.
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However, behavioral economists have found that people tend to value money that's right in front of them over money they will get in the future, even if the total over time would be greater. Plus, retiree advocates say that most people aren't well-equipped with the advanced financial knowledge needed to fully evaluate their options, and often, they're pressured by family members. A study by MetLife found that one in five retirees who took lump sums spent them down within five and a half years, and nearly a third regretted using large chunks of the money for short-term needs like home improvements.
It's not that much money at all. But they don't think about it that way. In , the Government Accountability Office issued a report finding that the rules the IRS had set up around mortality tables and interest rates allowed companies to offer lump sums at a significant discount to the actual value of the pension. Retirees who tried to reinvest the lump-sum payments would almost inevitably lose out — especially women, who tend to live longer than men and are more likely to run out of money in retirement. But there was no requirement that companies disclose the imbalance, and retirees were taken in by promises from financial advisers that they could do a better job with the money.