Employees work many years in anticipation of pension benefits upon retirement. The benefits include cash distributions by the plan sponsor, or employer, when an employee reaches the retirement age. Payments can be made in different forms, including monthly distributions or in a lump-sum cash allotment. While the value of pension benefits is determined by several different factors, the method of payment is up to the employee.
The value of pension benefits is based on a number of factors. Pension plan administrators apply a formula using components such as an employee's age, salary and years worked at the company to determine the amount of the benefits. A pension plan's worth is dependent on the amount of cash contributions made by the employer and employees, and the way that the employer invests those assets. The employer is accountable for having enough assets to pay employee pension benefits.
There are two primary ways that a retiree can receive pension benefits, including accepting ongoing payments through an annuity-style distribution for life, or receiving the cash in one lump sum payment. Receiving ongoing distributions is a more financially stable way to get paid because the income can be depended on throughout retirement. If a retiree has a lifetime goal to travel, achieving those dreams might only be possible with a large amount of money, in which case a lump-sum payment would make sense.
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Determining whether to take a traditional pension payout versus a lump sum benefit is a personal choice. An annuity style benefit is more stable, but there are risks. If the retiree dies, a spouse typically receives a percentage of the pension benefits. In a lump-sum payout, a retiree could run out of money and should have some type of equity wrapped up in a home or other assets to fall back on.
In a pension plan that is designed as a defined benefit structure, the employer makes investment decisions on behalf of its employees. Plan members are dependent on the plan sponsor for there to be enough benefits to pay the required benefits upon retirement. According to The New York Times, a public pension plan in Prichard, Alabama, became worth nothing. The pension halted pension benefits to 150 retirees and broke the law in the process.