A shrinking number of businesses, major corporations and local, state and federal governments still provide retirement security to workers by offering pensions. Beneficiaries include teachers, military service members and government employees. 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 past 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. Most companies default to pension payments, requiring the employee to opt out of the plan before retirement to receive the lump sum. The lump sum you can receive a check for the amount, or the amount can be rolled into an eligible tax plan such as an IRA.

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

Cons of lump sum

  • Money may not last long if spent all at once
  • Financial illiteracy may lead to poor investment of funds and loss of capital over time

Pros of payments

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

Cons of payments

  • Equal monthly payments may not account for an increased cost of living
  • Much of your pension is reliant on the financial health of your former employer’s pension fund

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.

Some questions to consider while deciding how to accept the pension include:

  • How long will my spouse live? A lump sum may not last long enough if the pension recipient or their spouse has a high life expectancy.
  • How much can I afford to lose? Those without other wealth may benefit the most from payments rather than lump sum.
  • Can I skillfully invest the money? If you or your spouse is a savvy investor, taking a lump sum and investing it wisely could result in more accumulated wealth in the long run.
Comparing Lifetime Payments and Lump Sum
PaymentsLump Sum
Is my pension guaranteed?Yes, on a regular basis through the end of your lifeYes, only once
Is my pension protected from inflation?Yes, if the pension payments factor in cost-of-living adjustmentsPossibly, if invested in a conservative stock portfolio
Is my pension protected from stock market changes?YesNo
Do I invest the pension?No, the employer or insurance agency does thisYes, if you choose to
Can my spouse or children inherit my pension?YesYes

Pensions for Teachers

Teachers of all grades, from kindergarten to law school and medical school, are a large group of American working professionals who usually are eligible to collect pensions after they retire. This mostly affects public school teachers who draw years of income through school systems that participate in county or state retirement systems. These pensions differ from state to state but are generally referred to as Public Employee Retirement Systems and Teachers Retirement Systems.

Some states automatically withhold a portion of a teacher’s paycheck and then contribute another portion to a retirement fund. In other states, teachers must work at least 10 years before they’re allowed to allocate pre-tax dollars to retirement plans. Teachers – and school administrators as well as county and state admin and executive staffers – who work 25 to 30 years in a public school system gain the greatest benefit from these systems, which tend to reward same-school and same-system tenure.

Changing schools, school districts and especially changing state can mean losing pension eligibility. (This is especially true for athletic coaches, some of whom tend to migrate from school to school and state to state over a long career.) 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 not to have pension plans. Instead, they offer IRA or 401(k) retirement options.

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. 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.

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