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Debate: Should Pension Participants Accept Lump-Sum Buyouts Now?

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Data shows that large pensions improved their funding dramatically in 2021. Still, pensions remain unattractive to many companies, so it’s widely expected that those companies may use their increased funding to transfer the risk to an insurance company or offer lump-sum buyouts to participants.

With interest rates on the rise, it’s debatable whether now may be the right time for participants to accept those lump-sum buyout offers in lieu of receiving traditional pension benefits as annuity payments.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about whether now may be the time for clients to accept a lump-sum pension buyout offer.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Byrnes

Bloink

Their Reasons:

Byrnes: As far as retirement plans go, pensions are a fairly antiquated option. That’s one reason why companies are looking to reduce their pension-related risks at a rapid rate. That’s something we should encourage in order to allow businesses to grow without being encumbered by pensions that were established decades ago. Most Americans today have access to the type of financial advice they need to effectively manage their own funds and create their own stream of income in retirement. 

Bloink: In today’s economy, retirees and near-retirees are unfortunately facing more uncertainty than ever. Many clients who are fortunate enough to have a pension option should take advantage of the security that these pensions can generate through regular annuity payments over a lifetime. 

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Byrnes: With interest rates on the rise, many of these Americans will have access to secure investment options that can generate guaranteed returns even without a pension. More Americans should be advised about the choices they can make with respect to annuities and other investment vehicles to tailor their retirement investments to their individual needs. 

Bloink: Lump-sum pension buyouts aren’t anything new. While they may be beneficial for some pension beneficiaries, the fact is that too many retirees who choose to accept a lump-sum option buyout offer aren’t managing their funds responsibly. That creates a much more serious risk that their savings will run out during retirement, when they need income the most.

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Byrnes: interest rates are rising to a point where more clients would benefit from locking in rates within some type of annuity product. That eliminates the risk of the pension running out of funds while also ensuring the client has sufficient income in retirement — and has the added benefit of allowing the client to choose an annuity or financial product that more fully meets their needs.

Bloink: In the end, every pension participant has to carefully evaluate the pros and cons of a buyout offer considering their own situation. For individuals with reduced life expectancies, the buyout may be the most valuable option from a financial standpoint. Others can and do manage their lump sums effectively. 

This is one of those issues where there is no single right or wrong answer — but we shouldn’t advise clients to accept buyout offers solely based on current market conditions and interest rates at the time, because we have to think that most clients won’t simply reinvest the lump sum in an annuity to recreate the pension income stream.

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