Pension decision - annuity or lump sum?

Fug1 · Post by **Fug1** » Fri Oct 07, 2016 6:48 pm

I am a Canadian living in the USA under green card status. I've been a participant of a defined benefit (pension) plan through my employer.

The pension plan has ceased and they're giving me the option of taking a lump sum rollover into an IRA or receiving an annuity at the age of 65. The annuity would be managed by an insurance provider. I'm still 20+ years away from retirement. I do expect to move back to Canada at some point.

I've been considering the pros and cons of each of these options, and could really use some advice. If it helps, the lump sum they're offering is less than 10% of my net worth.

Lump sum IRA rollover:
- Pro: Would simplify my finances, since I already have an IRA.
- Pro: I could potentially convert the IRA to a Roth before moving back to Canada, which may save some tax in the long run. Doing this would also reduce taxable income during retirement, so I could potentially avoid any clawbacks to SS, CPP and/or OAS.
- Pro: When I die, any remaining balance in the IRA would pass to my heirs.

Annuity:
- Pro: The true value of the pension as an annuity is roughly twice the amount they're offering as a lump sum.
- Pro: An annuity would be more difficult to extract from me in the event I'm sued or a victim of fraud.
- Con: The insurance company holding the annuity may not be equipped to deal with non-residents.

Thanks in advance for any advice you can offer!

nelsona · Post by **nelsona** » Fri Oct 07, 2016 7:18 pm

I would take the IRA.

The annuity is twice as much because it is YEARSSSSS away.
Also, if you move back to Canada, the annuity will be subject to Cdn tax, and will affect your OAS clawback, like you said. The IRA, if handled properly might never see the Cdn taxman.

Fug1 · Post by **Fug1** » Fri Oct 07, 2016 7:44 pm

Thanks, Nelson! Even factoring in the length of time before my retirement, the lump sum is half the value of the annuity. I just got a couple of annuity market quotes (using my current age, the monthly benefit, and annuity start date at the age of 65). I gather this is pretty typical with pension lump sum offers...the interest rate assumptions and mortality tables are loosely regulated, but companies try to low-ball the lump sum as much as possible.

With that additional information, would you still take the IRA?

nelsona · Post by **nelsona** » Fri Oct 07, 2016 10:50 pm

So, are you saying that the lump-sum is half of what it would COST you to buy an annuity today, equivalent to that which the firm is offering?

Sucks. Most firms converted their employees to cash balances when they stopped their pension plan. They aren't even willing to do that. These guys have basically taken away your pension completely. Ots in the last few years of work that your pension really grows. You won't get that with this firm.

Put it this way. With the lump-sum, you are taking the loss right now. With an annuity, you will be losing forever, as annuities are almost always losing propositions, especially fully taxable ones like this one would be.

Fug1 · Post by **Fug1** » Sat Oct 08, 2016 9:51 am

Yes, that's right. I'm not sure what you mean by "converted their employees to cash balances", but they've basically given me 5 options.

1. Roll over the lump sum into an IRA
2. Roll over the lump sum into the company's 401k
3. Take the lump sum as cash (and take the tax hit right now)
4. Start taking monthly annuity payments right now
5. Take monthly annuity payments at a later date (i.e. retirement age)

I've only been considering options 1 and 5. I've been thinking of option 5 as basically "keeping" the pension, since the monthly benefit will be the same as the amount I've accrued (quite far in the future).

As a bit of additional background, the company I was working for was acquired by another company earlier this year. The new company doesn't have a pension plan at all. The old company stopped the pension plan just before the acquisition.

I've come to realize that these defined benefit plans really work out better for older employees. For some of my colleagues that are closer to retirement age, the lump sum that's been offered is much closer to market value.

Thanks again for your help, Nelson!

nelsona · Post by **nelsona** » Sat Oct 08, 2016 8:02 pm

Yeah, so basically your old company screwed you like the new company had always been screwing their employees. What have they offered you to replace the pension? This what I meant by "cash balance". The firm has to feel some need to replace what you have lost, no?

btw, Rolling into 401(k) is just as good as IRA, IMO.

Fug1 · Post by **Fug1** » Mon Oct 10, 2016 2:56 pm

Ah yes, I see what you're saying. We didn't get anything from the old company. The new company is providing 3% of our salary into a retirement plan (no employee contribution necessary). Employees over the age of 45 get an additional graded percentage because they are particularly affected, being closer to retirement age. This is on top of the 6% 401k match we receive, which is roughly equivalent to what we were getting for a 401k match with the old company.

Yes, 401k and IRA would be roughly the same. I mainly preferred the IRA because you get more flexibility with the funds you can select. But the 401k probably has slightly lower fees and it has better creditor protection.

nelsona · Post by **nelsona** » Mon Oct 10, 2016 4:53 pm

Yes, so the 3% etc is what is know as a cash balance plan.
I'm surprised they didn't offer to roll the lump-sum into the cash balance plan.

Fug1 · Post by **Fug1** » Tue Oct 11, 2016 11:26 am

Interesting, I hadn't considered that. What would be the advantage of rolling the lump sum into that plan (they call it a retirement accumulation plan), as opposed to an IRA or 401k?

One other thing to note is that not all employees have access to the retirement accumulation plan. It's for anyone below Director level. Director level and above get a full value share plan, which is supposed to be better with the new company than the old one. I haven't heard any details about it yet, though.

nelsona · Post by **nelsona** » Tue Oct 11, 2016 5:44 pm

The advantage is that it would grow at the guaranteed rate of the cash balance plan which is certainly better than annuity.

Fug1 · Post by **Fug1** » Wed Oct 12, 2016 12:51 pm

Okay, our retirement accumulation plan is different, as I understand it. It works similarly to a 401k, where you take the contributions and apply them to a limited selection of mutual funds. So the growth grate isn't guaranteed.