Pension Decision Planning Services

As you can imagine, or maybe you’ve already experienced this, the process of choosing can be very nuanced. Maybe the lump sum (which is almost always rolled into an IRA, tax-free) would create a legacy for your grandchildren, or would make for a nice contribution to some long term care planning. Maybe you need maximum monthly income each month and have great family health history and longevity potential, thus leading toward one of the pension income choices.

In addition to these planning variables, another facet of the pension decision to consider is that of tax efficiency. Since pension income is taxable to the recipient as ordinary taxable income, the pension income will result in not only taxes owed on the pension itself, but could increase the tax rate on all of a person’s retirement income sources. For example, receiving pension income each month is likely to cause a retiree’s Social Security Income to be taxed at a higher rate than it would if there was less total income to be taxed. 

As an example, a person who may not need all the income each month that a pension income would provide may be wise to choose the pension lump sum option. Since the lump sum is rolled over into an IRA tax-free, the lump sum can remain tax deferred until later when income is needed or desired, thus resulting in a lower tax rate for the years until more income is needed. This lump sum in the IRA can either be used for periodic withdrawals when desired, or it can be converted into a consistent but smaller income by using an annuity or an income-focused investment approach. The risk, however, is that by deferring the pension lump sum tax until later may cause even more tax owed when Required Minimum Distributions must begin; it could push the taxpayer into a higher tax bracket. Again, this is yet another nuance to be considered in the pension decision.