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More reasons to take a lump

By Jennie L. Phipps ·
Wednesday, June 20, 2012
Posted: 12 pm ET

Beginning this year, some tax and other legal changes have encouraged corporations to look for ways to unload their liability for pensions by offloading them onto an insurance company.

The first major employer to take advantage of this change is General Motors. GM is offering about 42,000  retired, salaried employees the option of taking their remaining pension money as a lump sum. They don't have to do it. They can continue to receive the same monthly pension payout, but going forward, insurer Prudential Financial will take over the payments -- and more critically, the financial risk.

If Prudential were to fail, the government Pension Benefit Guarantee Corp. will no longer have ultimate responsibility for continuing to pay retiree pensions. Prudential annuities are backed by state guarantee funds. These guarantees are lots lower than those offered by the PBGC -- in Michigan, where many GM retirees live, the maximum guarantee is $250,000.

Deciding to take the lump isn't a simple decision. Jeff Davies, a financial adviser at The Schindler Group in Birmingham, Mich., has been holding free, well-attended online seminars on the matter that are open to retirees and other interested people anywhere in the country. He says most of the people he is dealing with would receive anywhere from $750,000 to $2 million if they took the lump. They would roll this money into an individual retirement account and invest it themselves -- or with an adviser's help.

Davies calculates that Prudential is promising to pay about 4.35 percent per year annually for the rest a retiree's life. When a retiree dies, his spouse continues to get 65 percent. In today's low-interest, high-fee and tricky investment market, a retiree would have to earn at least 6 percent -- probably more -- consistently to do better than what Prudential is promising. But Davies outlines some circumstances where taking the lump almost certainly makes the most sense.

These are not just isolated issues. GM is just one of the first and the biggest to make this kind of switch. More companies are likely to make the same offer to former employees who are living in retirement. Here are the retirement planning issues to consider before you have to make such a decision.

  • If you aren't legally married to your significant other, that person won't receive any of your pension after you die. The lump sum will allow you more flexibility to leave an income to that partner.
  • If you don't think you'll need this pension money to live on -- you have lots of savings and/or your spouse has a generous pension, too -- then taking the lump will give you more room to maneuver financially.
  • If you're betting on high inflation, take the lump, but if you think the U.S. could follow Japan and have years of deflation, hold onto the pension.
  • If a member of your family has special needs, creating a trust with a lump sum is the best way to ensure that person can pay for care.
  • If you don't trust Prudential with such a big pot of money, putting it elsewhere could make you feel better. Prudential is a solid company, but as one retiree pointed out to Davies, 15 years ago, GM was a solid company.

Davies offers one more smart tip. If you are leaning toward taking the pension, get a physical exam first. This is an irrevocable decision. It's better for everyone if you find out negative information about your health before you make the commitment and can't change your mind.

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