Managing Your Pension Income
Should You Take a Lump Sum Distribution?
"Deciding whether to take a lump sum distribution is a highly personal choice," says Bill Hunter, director of Personal Retirement Solutions for Merrill Lynch. "There is no one right answer." He suggests you consider discussing the following important factors with qualified tax, legal and financial advisors.
How old are you? Are you in good health? What about your life expectancy and your monthly expenses? Could they change? Do you have sufficient other sources of guaranteed retirement income or investments? Most important, if you take a lump sum distribution, are you confident in your ability to invest the money effectively?
As you decide, weigh the following: Your pension represents a known quantity — you can expect to receive fixed monthly payments until you die, as long as the issuer is solvent. On the other hand, if you take the distribution, you'll be able to access the funds when you need them — for instance, if you have a health emergency. A lump sum distribution may also enable you to pass any remaining assets on to your heirs or a favorite charity.
To avoid paying current income taxes on the distribution, you could roll the funds directly into an IRA. That way you won't owe tax until you withdraw money — and your income tax rate will be determined at the time of that withdrawal. Rolling the amount into an IRA could also give you access to a broad range of investment choices. But bear in mind that if you are younger than 59½, and you withdraw money from the IRA, you will pay a penalty to the IRS for an early distribution.
Among the significant risks to consider regarding the lump sum distribution is that you may be tempted to spend the money rather than investing it for the long term. And, if you do invest it, there's always the chance that a market downturn could cut into its value and result in loss of principal. Some people seek to counter that risk by putting a portion of the distribution into an annuity, which is designed to provide a steady stream of guaranteed income (subject to the terms and conditions of the annuity contract).
Should you decide to purchase an annuity, be aware that it may not provide you with the same monthly payment that your pension currently offers. Higher fees and withdrawal penalties will impact your payouts. The bottom line: Estimate how much you would get over your expected lifetime under your current pension payout, then ask yourself whether you are comfortable foregoing that guaranteed income for the potential of higher returns — and the investment risks that accompany them — if you take the distribution. Your Financial Advisor can help you make the calculations.
Any information presented about tax considerations affecting client financial transactions or arrangements is not intended as tax advice and should not be relied upon for the purpose of avoiding any tax penalties. Neither Merrill Lynch nor its Financial Advisors provide tax, accounting or legal advice. Clients should review any planned financial transactions or arrangements that may have tax, accounting or legal implications with their personal professional advisors.
All annuity contract and rider guarantees, including optional benefits and any fixed subaccount crediting rates or annuity payout rates, are backed by the claims-paying ability of the issuing insurance company. Long-term-care insurance coverage contains benefits, exclusions, limitations, eligibility requirements, and specific terms and conditions under which the insurance coverage may be continued in force or discontinued. All guarantees and benefits of an insurance policy are backed by the claims-paying ability of the issuing insurance company. Guarantees and benefits are not backed by Merrill Lynch or its affiliates, nor do Merrill Lynch or its affiliates make any representations or guarantees regarding the claims-paying ability of the issuing insurance company. For non-qualified and stand-alone qualified annuity contracts, annuitization must occur by the annuitant's age 95. At that date, any guaranteed minimum death benefit no longer will apply. Clients should contact the issuing insurance company prior to the maturity date to discuss options, including changing the annuitant, if permitted by the annuity contract. For custodially held qualified contracts, as a distributor Merrill Lynch will not require annuitization at age 95.
For more detailed information about the fees associated with an IRA please refer to your IRA Disclosure & Custodial Agreement and your commission schedule. For more information about the fees associated with annuities, please contact the issuing insurance carrier. Also keep in mind that an annuity's guarantee is subject to the underlying issuer's ability to pay, which is called default risk.
Please consider your personal investment objectives, financial situation, time horizon, liquidity requirements, and particular needs before making any investment decisions. Investing in securities involves considerable risk, which you are not exposed to in the pension plan, including the possible loss of all of your principal and the chance that you may outlive your funds.