Pension Lump Sum Distributions

Recently, the IRS released a revenue ruling announcing that it would not amend the required minimum distribution (RMD) rules in such a way as to prohibit pension plans sponsors from offering a lump sum “cash out” option to plan beneficiaries who are already in pay status—in other words, to those beneficiaries already receiving their pension benefits as an annuity. While the ruling does not explicitly permit plan sponsors to offer a lump sum distribution option to beneficiaries in pay status, the IRS essentially indicated that it had no current plans to explicitly prohibit this option, leading to debate as to whether such a move is advisable.

We asked two professors and Tax Facts authors with opposing political viewpoints to share their opinions about the advisability and potential impact if pension plans were to begin offering retired beneficiaries the option of converting their pension annuity payments to a lump sum payment.

Their Votes:



Byrnes



Bloink

Their Reasons:

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

Byrnes: I think this is a fine idea. The restrictions in the IRC about changing benefit levels for retired pension beneficiaries in pay status should only apply to restrict situations where the retired beneficiary is going to be adversely impacted. Giving a beneficiary who is already receiving an annuity benefit the option of switching to a lump sum helps the pension and helps the beneficiary—a win-win situation.

Bloink: Professor Byrnes overlooks the fact that many pension beneficiaries don’t have the access to financial advice necessary to manage those funds in retirement. Remember, the entire point of an annuity pension benefit is to provide security to these recipients for their entire lives. Giving them access to lump sum options at this point could spell retirement income disaster for former workers who don’t simultaneously have access to the professional advice needed to appropriately manage a lump sum to provide secure retirement income potentially for decades.

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Byrnes: So many pension beneficiaries are reading the news and wondering whether their pension benefits will even last a lifetime at this point. Plan sponsors are doing everything they can to de-risk, and yet they’re still petitioning to reduce benefit payments to those already receiving payments. Letting these beneficiaries change their minds and take a lump sum buyout would provide peace of mind to a lot of retired folks who are nervous about their benefits.

Bloink: I’m not saying a lump sum buyout is a bad option. I’m saying that it’s a bad idea to provide the option without simultaneously providing these beneficiaries with access to much-needed financial advice to protect their financial stability going forward.

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Byrnes:Beneficiaries aren’t under any obligation to accept the buyout offer—it’s just an option. And frankly, it’s an option provided at a time when a lot of these retired folks now have better information necessary to make an informed decision. Evaluating a pension buyout involves looking to your life expectancy and the long-term viability of the pension itself, and many retired beneficiaries have better information now than they did 20 years ago.

Bloink:In this day and age, I would wonder who wouldn’t take the cash-out offer with all the media coverage surrounding pension woes? With proper management, a retiree can take a buyout and turn that into a secure lifetime income stream that might be even more stable than that provided by the pension plan itself. But an untrained beneficiary who puts the payout in a checking account? Or worse, goes on a buying spree? We could see some people put into a bad financial situation because of the in-retirement cash-out option. We shouldn’t be encouraging pension de-risking if that, in turn, is putting a class of former workers at risk. If pension plans want to de-risk in this way, they should be responsible for providing at least some basic financial counseling in conjunction with the cash-out offers.