A pension is an arrangement to provide people with income when they are no longer earning a regular income from employment. A pension plan is usually established by an employer, insurance company, government, union, or other institution. A pension plan is typically in the form of a defined benefit or defined contribution plan. Contributions to defined contribution pension plans are typically tax deductible. In some cases, an employer may match contributions made by an employee to encourage the employee to participate and save for retirement. A defined benefit plan is usually funded by an employer, and provides a guarantee to an employee for a lump sum of money or a stream of income beginning at a certain retirement age.
Using a pension annuity can reduce the risk associate with outliving retirement savings. There are generally two different types of pension annuities: deferred pension annuities or immediate pension annuities. Most pension plans, including individual retirement accounts (IRAs), will allow the plan to purchase an annuity with the money in the pension plan. You may decide to use a portion of the money in your pension plan or all of it. At the end of the day it is entirely up to you.
Immediate pension annuities, also call life pension annuities, provide a guaranteed stream of income during retirement from a pension plan. The guaranteed income will be determined prior to purchasing the annuity, and can be setup to provide you with income for the rest of your life. This type of annuity will insure against the risk of outliving retirement savings.
Deferred pension annuities are typically utilized when accumulating assets for retirement. Most advisors would recommend against having a pension plan owning a deferred pension annuity simply because the tax benefits available through an annuity already exist in the pension plan. Since there is no tax benefit to owning an annuity, some would argue there is no benefit to having the annuity. With that said, we generally agree. However, it may make sense to review the benefits of owning a fixed deferred pension annuity in your pension plan. Fixed deferred annuities will typically have a higher fixed rate of return then the money market or fixed account available in the pension plan.
If a fixed deferred pension annuity was crediting a fixed rate 4.00% and the money market account in the pension plan was crediting a fixed rate 1.00% wouldn’t it make sense to look at the fixed deferred pension annuity?
The decision to purchase an annuity is important. Annuities are not for everyone or every situation, especially when considering whether or not your pension plan should purchase an annuity. It is important to discuss all of your options with an annuity professional. Please call (877) 579-9575 to speak with an annuity professional or request an annuity quote.
