PENSION BUYOUTS: Easing the choice of taking a pension or a buyout

If you’re considering retirement, you may face the difficult decision of whether to take a pension or a buyout. Both options have pros and cons, and it can be challenging to determine which is best for your unique financial situation. At Sherwood Investments, we understand the complexities of this decision and we are here to help you easily navigate the process.

What is a pension buyout?

A pension buyout, also known as a pension lump sum, is an offer made by an employer to a retiree to purchase their pension benefits as a single lump sum payment. This lump sum payment is typically based on the value of the retiree’s future pension payments.  We do the complex calculations for you, determining if you are better off accepting the buyout or a pension.  We then explain the trade-offs between your options in plain English.

Why consider a pension buyout?

There are several reasons why a pension buyout may be attractive. A big advantage is that it gives retirees greater control over their retirement savings. By taking a lump sum payment, retirees have the flexibility to invest the money as they see fit and manage their own retirement income streams. A pension does not increase with inflation. Therefore, a decently managed buyout has a definite potential for higher returns and to grow with inflation.

Another advantage of a pension buyout is that you don’t have to worry about the solvency of their employer or the risk of the plan being terminated in the future.

A big advantage of a buyout is what happens at the retiree’s death.  The invested buyout is passed along to the beneficiaries, whereas a traditional pension plan either stops or the beneficiaries receive reduced payments. Thus, a pension buyout is usually very attractive to retirees who have a shorter life expectancy and/or want to leave an inheritance to their heirs, as well as those who just want more control over their pension.

Why consider a traditional pension plan?

While a pension buyout may be attractive to some retirees, a traditional pension plan also has its advantages. An advantage of a traditional pension plan is that it provides retirees with a guaranteed and predictable income stream for life. With a pension plan, retirees don’t have to worry about managing their own investments or the risk of outliving their retirement savings.

A traditional pension plan may be more attractive to retirees who are risk-averse and don’t want to worry about market volatility and fluctuating investment returns.  It tends to appeal to retirees with less investment experience or who are skeptical of finding a qualified investment advisor to manage their investments. With a pension plan, retirees rely on the expertise of professional fund managers to manage their retirement savings.

How to make the right choice?

Choosing between a pension buyout and a traditional pension plan can be a challenging decision and it’s important to consider several factors before making a choice. One of the most important factors to consider is your financial situation. Do you have other sources of retirement income, such as Social Security or personal savings? If so, a pension buyout may be more attractive to you.

Another factor to consider is your personal preferences. Do you prefer the flexibility and control that comes with a lump sum payment, or do you prefer the security and predictability of a traditional pension plan? Your personal preferences and risk tolerance will play a significant role in determining which option is best for you.

Finally, it’s important to consider the financial stability of your employer’s pension plan. If your employer’s plan is well-funded and has a strong track record of providing retirement benefits, a traditional pension plan may be attractive to you. On the other hand, if your employer’s plan is underfunded or has a history of financial instability, a pension buyout may be a better option.

Choosing between a pension and a buyout can be a complex decision, but with the right guidance and information, you can make an informed decision that best suits your financial situation. At Sherwood Investments, Eric can help individuals navigate the complexities of pension buyouts and create a retirement plan that provides financial security and peace of mind.

There are many opportunities in today’s market and evaluating the pros and cons of each option to determine which is best for you can be complex. Get in touch with Eric at Sherwood Investments today!

Please contact us if you want to simplify and improve your life.

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