Can I Sell My Pension?

Is selling your retirement plan a good idea? Can you cash in employer sponsored pension?

Should I sell my pension? Is it possible to sell pension payments for cash out an employer sponsored pension for a lump sum?

In selling future pension payment streams, you would get far less now in a lump sum than you would get at maturity time of the periodic proceeds.

Also, by cashing in your pension, you are giving up a steady post-retirement income stream.

Employer sponsored pension

Military veteran pension buyout

What if your employer is offering to buy out your pension for a cash lump sum now?

(To be sure, we're not buying or cashing out military veteran pension,  government pension payments, retirement plans, etc..)

Employer Pension Buyout - Pros and Cons

Your employer may have good reason to offer you a lump sum instead of continuing your pension plan.

A pension buyout may reduce his administrative expenses and increase the income of his business.

The question is: is selling your pension in your own best interest?

Let me point out some pros and cons of selling your pension to your employer, the way I see it, at least.

First, the benefits:

Sell My Pension - Advanteges

• You get a big fat lump sum check

• You have full control over spending and investing your money

• You are not dependent on your employer and his financial success or troubles

• You can use it to cover large expenses that you may currently have

• You can reinvest your money in something you thing is a good investment, allowing you to grow your money possibly keeping up with inflation as well as increasing health costs while your pension may not increase over the years

• You may be able to leave some of the money to beneficaries

Downsides

• You take over full responsibility and do not get anymore the Federal government guaranty for your pension (in case you get your pension in annuity payouts, you cease being protected by the agencies protecting retirement annuity plans)

• You are at risk of mismanaging your money, spending it out too soon, making bad investments - if you do not have skills of investing and managing money

• You are giving up the security and convenience of earning long-term guaranteed steady streams of income to support your life in the future

• You get a large sum at once and taxes are applicable and not deferred

• Your pension may have spouse benefits leaving a source of income to your spouse when you die, something you don't get with a lump sum buyout that you have to manage on your own; furthermore, your spouse may not be as good as yourself at managing/investing a large amount of money left to him/her

• You may lose your health insurance coverage by the company along with selling your retirement plan (check with your employer)

• You get only the Present Value of your future pension payments, meaning that the future pension payouts are discounted to the value of the money today

(The discount rate has traditionally been calculated based on a 30 year  US Treasury Rate; however, this has changed in accordance with new regulations by the Pension Protection Act of 2006, or PPA.

The Discount Rate is a very important factor and can have a significant effect on the amount you get from your pension buyout.

As a rule, the higher the discount rate, the LOWER is your present value.)

• You may lose early-retirement benefits by selling your retirement plan for a lump sum

(Companies offer early-retirement benefits to encourage employees to retire early for various reasons, including sending out older employers in favor of younger, more enthusiastic ones that are of more value for them; reducing administrative and insurance costs; and increasing their income)

• Your pension payout is calculated based on your life expectancy; but a lump sum - even if invested in a way that it accumulates interests and then lets you take out the same amount as your previous pension annuity plan on a monthly basis for a much longer time  than your life expectancy - may, however be outlived by you and then leave you without this stream of income

(To simply a bit, let's suppose you're expecting to get an amount of $3000/month in pension annuities for x amount of years per your life expectancy.

Let's further assume you'll sell your pension for a lump sum and then reinvest the lump sum and it will earn you income that will last for a given amount of years if you take out the same $3000/month.

Now even if this amount of years will be longer than your life expectancy - but what if you have luck and live even longer?

Well, you'll not get any income since your investment has been depleted. On the other hand, pension will go on for the rest of your life even if you live longer than the expected years of your life.)

The Pension Benefit Guaranty Corporation

You may also want to consider your company's financial strength. Will it last long enough to pay my pension? and what if it goes bankrupt - will there be any backup and security for your payouts? Is this another reason to sell my pension?

I won't go here into discussion on whether or not a Defined Benefit Pension Plan is still a good option to rely on, and whether the Pension Benefit Guaranty Corporation (PBGC) is losing its strength as a pension protection agency. For a great, detailed treatment of this topic, I recommend you checking out this excellent article on the subject:

http://www.investopedia.com/articles/retirement/08/safe-db-plan.asp

Conclusion

Bottom line: when asking yourself, "should I sell my pension," you should carefully take into consideration all the above points and weigh the costs and benefits of each option. Remember, once you sell your pension, it will be too late to reconsider. 

So, Sell My Pension, Or Not -

Please express your opinion here and let other folks know what you thing about this question that many other find themselves asking when offered to sell their retirement plan to their employer: is it wise to sell my pension, or is it advised to go on with my regular pension plan and not sell my pension payments?