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November 02, 2022 at 03:57 PM
What You Need to Know
- Many pension plans offer lump-sum buyouts to participants in order to reduce future liability.
- Every pension participant (and lottery winner) has to carefully evaluate the pros and cons of a lump-sum offer, according to their own situation.
- There is no single right or wrong answer, tax experts say.
Any time the Powerball jackpot approaches record territory, the public starts to pay attention.
This week, the Powerball jackpot topped an estimated $1.2 billion ahead of the Wednesday night drawing, sending office workers and construction crews alike to their local gas stations and bodegas to buy their tickets.
Many lottery players have put a lot of thought into what they might do with the winnings. What many Powerball hopefuls overlook, however, is the fact that the $1.2 billion jackpot actually only equates to a present-moment cash value of roughly $597 million. In other words, a jackpot winner who wants their full winnings up front will get only about half the stated value of the jackpot drawing.
For advisory industry professionals, the trade-offs between taking a jackpot cash lump sum versus a stream of guaranteed future payments probably calls to mind the decision facing many pension plan participants upon retirement. Does one accept a lump-sum payment or take the lifetime annuity?
Earlier this year, ThinkAdvisor asked two tax experts to debate the question: William Byrnes, an executive professor and associate dean of special projects at the Texas A&M University School of Law; and Robert Bloink, also of the Texas A&M University School of Law. Byrnes and Bloink are the authors of Tax Facts, a reference solution that helps to answer critical tax questions and explains the latest tax developments.
According to the duo, data shows that large pensions improved their funding dramatically in recent years. Still, pensions remain an unattractive source of risk to many companies, so it is 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.
