Pensions

A shrinking number of businesses, major corporations and local, state and federal governments still provide retirement security to workers by offering pensions. In some pension plans, workers can choose how they want to get their money – through a series of payments, in a lump sum or a combination of the two.

During the growth of the American middle class that took hold after World War II, many employers offered pensions as an employee benefit. Pensions were a way a company could help workers pay for their retirement years. From pension funds, employers doled out monthly payments to former worker.

Pensions are established by employers putting aside money and managing the growth of these funds. The money put towards a pension is based on factors set by the issuer. Pensions generally require a minimum number of working years and pay out benefits based on age, health, experience and company resources. Both employers and employees pay into the account during the years an employee is working.

But over the past two decades, the number of workplace pensions dwindled as companies found them difficult to fund over a long period of time while constantly trying to please shareholders who wanted more profits and less long-term liabilities.

The bulk of employers today with pension plans are federal, state and local governments plus branches of the U.S military. The government issues pensions in various forms, including defined benefit and defined contribution plans.

Some private companies still offer pensions as a benefit, but private pension fund assets are large. Private sector pensions hold more than $2.2 trillion in assets and cover around 44 million working Americans. Federal pensions serve 2.3 million active civilian employees. State and local pensions cover 14.8 million active participants.

Some employers use their money to fund and control pensions. Others work with insurance companies to set up third-party annuities for employees, which provides security and relieves the company of the long-term financial obligation.

Companies like Verizon, General Motors, Ford and Heinz use annuities from insurance companies rather than issuing their own pensions.

Comparing Pensions and Annuities

Along with Social Security benefits, retirees rely on pensions and annuities, both tax-deferred benefits, once they stop working. These funds allow them to afford living expenses that used to be covered by income from monthly paychecks.

Employers often set up pensions to be paid in a series of installments. Similar to a life or longevity annuity, pension payouts begin close to or at retirement and usually last until the recipient’s death. (Some of them pay surviving spouses until their deaths, but in those cases payments are not full payments for either the retiree or the spouse).

Investment annuities are another type of financial product that come in a series of installments. Examples include single premium annuities or variable annuities. Unlike pensions, owners purchase them independently, and they’re not linked to an employer.

Do You Own a Pension and Annuity?

Some retirees have the luxury of owning one or more pensions and an annuity (or multiple annuities). In those cases, if immediate cash is ever needed, it’s available. Those retirees can transfer their annuities for money now without the fear of not having enough monthly income. These annuitants can fall back on pension income, which gives them increased financial security.

Pension Plan Changes

Today, fewer and fewer companies are offering defined benefit pensions. While Social Security payments still come in the form of pensions, this income used to be supplemented with defined benefit (DB) pension plans.

Pension plans date back to ancient Rome, when soldiers received pensions after years of service. President Franklin Roosevelt popularized pensions in the United States by introducing the world’s largest defined benefit pension plan in 1935 with the Social Security Administration.

Defined benefit plans are based on a fixed sum and provide employees with benefits regardless of how a business is doing.  When businesses suffer, the Pension Benefit Guarantee Corporation (PBGC) helps protect retirees. This federal agency, created as part of the Employee Retirement Income Security Act, guarantees private pensions are safe.

In the last few decades, companies started switching to defined contribution (DC) plans like IRAs and 401(k)s. DCs payments are based on investments returns and put the option of putting funds into the plan on the employee.

Companies have difficulty maintaining DB plans because the financial burden is on them. They must account for losses from inflation (when a sum loses purchasing power over time) and declining business. When interest rates are low and the stock market is dropping, DB plans must be financed with out of pocket funds.

A 2014 survey of the top 1,000 retirement plans found the DC assets increased by 12.8 percent this year, as opposed to DB assets which increased by 6.4 percent, according to Pensions and Investments, a nonprofit organization for retirement security.

Pension Payments and Lump Sums

Pension owners often hit a crossroads when they retire. Somewhere between ages 55 and 65, they’ll have to decide whether they want a lump sum payout, a series of payments or a combination of the two.

Pros of lump sum

  • Access money for large purchases
  • Potential for putting cash toward high-yield investments
  • Prevent payments from losing value because of inflation

Pros of payments

  • Choosing an annuity provides security but less flexibility
  • Guaranteed income for life
  • Taxes spread out over time

Pros of combination of lump sum and payments

  • Balance immediate and future expenses
  • Access a large portion of pension for medical bills and other needs
  • Reliable income over time

By law, a pension plan must provide a lifetime annuity option that pays benefits until you die or until a surviving beneficiary passes away. Your plan may offer a lump-sum option in lieu of, or in addition to, a life annuity.

Pensions for Teachers

In addition to the bonus of tenure, many teachers can access monetary benefits provided by pensions through each state’s retirement systems. These offerings differ from state to state and are referred to as Public Employee Retirement Systems and Teachers Retirement Systems.

Some states automatically withhold a percentage of pay and contribute this to a retirement fund. In other states, teachers must work at least 10 years before putting money toward retirement plans. Teachers working 25 to 30 years in a position can access the greatest amount of benefits. Pension systems award teachers who stay long-term working in the same schools.

Changing schools, school districts and, especially, states can mean losing pension eligibility. In some cases, the stringent requirements for attaining full pension benefits make private sector jobs more appealing. However, private sector teachings job are more likely to offer IRA or 401(k) retirement options rather than defined benefit plans, which are based on experience and age.

While critics worry about the long-term sustainability of some state education pension systems, right now these payments are still a guaranteed benefit for educators.

Teachers needing money from their pension savings can contact pension purchasers and sell payments in exchange for a cash advance.

Pensions for Veterans

Those who serve in the military and meet certain qualifications may qualify for the Veterans Pension, which is a need-based, monthly monetary benefit that is tax-free.

Those minimum requirements include at least 90 days of active duty during a wartime period (WWI, WWII, Korean War, Vietnam War or the Gulf War) or at least 24 months if you entered active duty after Sept. 7, 1980.

Applicants also must be:

  • Age 65 or older, or
  • Completely and permanently disabled, or
  • A nursing home patient receiving skilled nursing care, or
  • Receiving Social Security Disability Insurance (SSDI), or
  • Receiving Social Security Income (SSI)

Also available to families of veterans is the Survivors Pension. This program is available for low-income, unmarried surviving spouses or unmarried children of deceased veterans. Veterans and survivors with additional needs, who require assistance or must remain at home, can apply for supplemental income such as Aid & Attendance (AA) and Housebound plans.

Getting a Lump Sum for Pension Payments

Pension recipients may be able to find buyers offering a lump sum in exchange for future payments, but the transfer is not cut and dried like with selling single premium annuities or structured settlements.

Annuity.org does not provide this service. Our site, along with many of the most competitive annuity funding companies in this industry, doesn’t purchase pensions because of the stringent rules prohibiting many of these transfers.

Federal law prohibits assigning of military and civil service pensions and the IRS code prohibits the sale of some private pensions. Both the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) alerted pensioners to be wary about accepting cash buyouts.

However, a select amount of funding companies will purchase pension payments in exchange for a lump sum. These businesses may be devoted solely to pension transactions or they may offer other financial services also.

Companies that buy pensions refer to the practice as factoring structured settlements or setting up mirrored pensions, pension income programs, pension advance, pension loans, secondary-market annuities.

Page Sources

  1. United States Government Accountability Office. (2014, June). Pension advance transactions. Retrieved from http://www.gao.gov/assets/670/663800.pdf
  2. Kujawa, P. (2015, Jan. 23). Balance coming due as new retirement plan gains favor. Retrieved from http://www.workforce.com/articles/21037-balance-coming-due-as-new-retirement-plan-gains-favor
  3. Burr, B. (2015, Feb. 10). Corporate retirement plans near tipping point. Business Insurance. Retrieved from http://www.businessinsurance.com/article/20150210/NEWS03/150219982/corporate-retirement-plans-near-tipping-point?tags=|63|338|77|82|307|329
  4. Pension Rights Center. (2015, Feb. 26). What we do. Retrieved from http://www.pensionrights.org/what-we-do
  5. Investment Company Institute. (2015, Jan.). Americans views on defined contribution plan saving. Retrieved from http://www.ici.org/pdf/ppr_15_dc_plan_saving.pdf
  6. CNN Money. (2015, Feb. 26). Ultimate guide to retirement. Retrieved from http://money.cnn.com/retirement/guide/pensions_pensions.moneymag/
  7. Towers Watson. (2014, Sept. 4). Retirement plan landscape stabilizing as fewer Fortune 500 companies shirting defined benefit plans to 401(k)s, Towers Watson analysis finds. Retrieved from http://www.towerswatson.com/en-US/Press/2014/09/retirement-plan-landscape-stabilizing-as-fewer-fortune500-companies-shift-defined-benefit-to-401ks
  8. Pension Benefit Guaranty Corporation. (2015, Feb. 26). Who we are. Retrieved from http://www.pbgc.gov/about/who-we-are.html
  9. Why People Need Pensions. (n.d.). Retrieved August 12, 2013, from http://www.pensionrights.org/get-facts/factsheet
  10. Fidelity.com. (2013, June 19). How to Take a Pension Payment. Retrieved from https://www.fidelity.com/viewpoints/how-to-take-a-pension-payment
  11. Darer, J. (2013, May 9). Selling or Buying Structured Settlements and Pensions - FINRA and SEC Warning. Retrieved from http://structuredsettlements.typepad.com/structured_settlements_4r/2013/05/selling-or-buying-structured-settlements-and-pensions-finra-and-sec-warning.html
  12. Financial Industry Regulatory Authority. (n.d.). Pension or Settlement Income Streams—What You Need to Know Before Buying or Selling Them. Retrieved August 12, 2013, from http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/AnnuitiesAndInsurance/P253851
  13. Fisher, D. (2012, June 6). Investors Who 'Buy' Pensions Are Buying Trouble. Forbes. Retrieved from http://www.forbes.com/sites/danielfisher/2012/06/06/investors-who-buy-pensions-are-buying-trouble/2/
  14. Tompor. S. (2013, June 29). Be Wary of Trading Pensions for Settlement. Detroit Free Press. Retrieved from http://www.twincities.com/ci_23561955/be-wary-trading-pension-settlement
  15. Caplinger, D. (2013, May 24). Selling Your Pension for a Lump Sum: A Bad Investment on Both Sides. Retrieved from http://www.dailyfinance.com/2013/05/24/selling-pension-income-stream-lump-sum-bad-deal/
  16. Hicken, M. (2013, May 21). Seniors Losing Savings to 'Pension Advance' Firms. Retrieved from http://money.cnn.com/2013/05/21/retirement/pension-advance/index.html?iid=SF_PF_Lea
  17. Almeida, B. (2008, May). Retirement Readiness – What Difference Does a Pension Make? Retrieved August 12, 2013, from http://www.nirsonline.org/storage/nirs/documents/Readiness%20Brief.pdf
  18. National Institute on Retirement Security. (n.d.). Pensionomics 2012: Measuring the Economic Impact of DB Pension Expenditures. Retrieved August 12, 2013, from http://www.nirsonline.org/index.php?option=com_content&task=view&id=684&Itemid=48
  19. National Institute on Retirement Security. (n.d.). Pensions & Retirement Security 2013: A Roadmap for Policy Makers. Retrieved August 12, 2013, from http://www.nirsonline.org/index.php?option=com_content&task=view&id=743&Itemid=48

Contact Us Now

Fill out the form below if you have a question or would like to get in touch with us directly.

Thank You!

Your question or comment has been submitted. Please feel free to give us a call at 866-528-4784 if you have any additional questions.

Get a Free Quote