If you have a pension when you retire, you will most likely be faced with the choice of taking a lump sum annuity. While this may seem to have its advantages, you may be surprised at how much taking a lump sum payment instead of rolling the funds into a different investment can hurt you if you don’t know what you are doing with it. Here are some reasons why it is important to create a budget and speak with a financial advisor before you do anything with the money in your pension.

What are you Going to do with Your Lump Sum Annuity?

Deciding to take a lump sum annuity can be a wonderful thing, right? After all, there are so many projects, bills, and debts you can spend it on. You may use your cash for:

• Medical expenses
• A new house
• A new car
• That dream vacation
• A college education

Beware of this kind of mentality.  Receiving a lump sum annuity is, for many, treated the same as a sudden windfall, a tax return, or a lottery winning. If you splurge foolishly, what will you be left with? You may have gotten rid of a few debts, but you have nothing to live off of. You then must either rely on credit cards to get by or work, just as you had before.

Financial Planning is Important

When you must decide whether or not to take a lump sum or annuity, it may be a hard decision to make. If you choose to accept a lump sum, you must be diligent about your expenses so you will be able to take care of yourself during retirement. There are a couple of paths that can make it easier for you to budget your money.

• Instead of spending all of your money at once, roll it over into a plan that offers you a monthly payment. This will allow you to invest your money in stocks or mutual funds, which will increase the amount of cash you have in the account, but still give you some income every month to pay your bills with.

• Purchase property and then rent it. You can live off of the extra money you make each month and when it comes time to sell your property, you can sell it for a profit.

These types of investments allow you to have monthly income while still being in control of the lump sum. You can decide how and when to invest your money.

However, even though you are in control of the lump sum annuity, you may need help choosing the best investments. This is where a financial advisor can come in handy. A financial advisor can help you budget your money so you have enough to live on while investing the rest of the lump sum. He or she will ask you questions in order to determine whether you are looking for a long term increase in the amount of your lump sum or a short term investment that will provide you with a steady monthly income. When the financial advisor has determined what investments will work best for you, he or she will explain how the investments work and help you get started.

When determining whether or not you want to take a lump sum or annuity from your pension plan for retirement, it is important to consider what you will do with your money. If you want to be in control of your own financial decision, a lump sum may be the choice for you.

Can Taking a Lump Sum Annuity Hurt You? is a post from: Lump Sum Annuity

If you have decided, or are even considering, cashing out your company’s retirement plan as a lump sum annuity distribution, you will need to consider the applicable tax rules.

Depending on your age and other variables, different rules apply. It’s always best to sit down with a qualified accountant to be sure of the rules and penalties that are relevant to your particular situation. Here are a few facts about lump sum annuity taxes to help you prepare your own list of questions for your accountant.

First of all, there are two basic scenarios. One for those born after 1935 and another for those born before 1936. Those born before 1936 have more favorable lump sum annuity tax rules. Let’s break it down:

Lump Sum Annuity Tax Information for Individuals Born After 1935

The best way to calculate the tax you’ll be responsible for, is by including your lump sum annuity payment as part of your ordinary income. You’ll list it on the first page of your 1040 income tax form.

The reason this is the best way is because of the fact that you’ll be able to deduct your personal exemptions from your lump sum annuity distribution payment. Once you’ve taken off your itemized deductions, capital losses, alimony payments, business deductions, and other allowable deductions, you may be able to offset your lump sum annuity distribution by quite a bit.

On the other hand, if you’ve had a banner income year with very few losses or deductions, you may find yourself piling your lump sum annuity payment on top of your other income, which could end up pushing you right into a higher tax bracket.

Plus, the extra income may increase your adjusted gross income (AGI) to the point where you may end up forfeiting other AGI sensitive tax breaks. If this ends up being your “lump sum annuity scenario,” you may do well to consider rolling over your lump sum payout into an IRA for the tax shelter benefits.

Lump Sum Annuity Tax Information for Individuals Born Before 1936

For those born before 1936, the tax laws are much kinder. Taxpayers receiving a lump sum annuity distribution that fall into this category have several options:

• Filing your taxes by reporting all or part of your lump sum annuity distribution on your 1040 as ordinary, taxable income (just as those born after 1935 are required to do). This is not likely to be the best option.
• Use ten year averaging to report all or part of your lump sum annuity funds on Form 4972. Your accountant can give you the specifics on this option’s pros and cons.
• Pay a 20% capital gains tax on the portion of your lump sum annuity distribution that is attributable to pre-1974 and use either of the first two options for the remaining balance. Note: Pre-1974 participation will be reported on Form 1099-R, which you should have received from your plan administrator.

The second and third option above are often ideal because of the fact that your adjusted gross income does NOT include income you’ve used the 10 year averaging on, or income you’ve paid the 20% capital gains tax on. If you are teetering between tax brackets, this may be your answer.

Obviously, you’ll need to do some additional research, crunch your own numbers, and probably seek the counsel of your accountant. We hope this article has provided you with some important facts to consider surrounding a lump sum annuity payment.

Lump Sum Annuity Tax Information is a post from: Lump Sum Annuity

If you are approaching retirement from your company, and an annuity pension plan was set up for you, there will be some decision making ahead. Now is the time to educate yourself on the pros and cons between a monthly payout or a lump sum annuity. To better understand what you are dealing with, we’ve got a few scenarios for you to consider.

Providing you have acquired a sizable amount for your pension, this is probably one of the most important decisions you will make.

Let’s look at a possible scenario. An individual (let’s say his name is Jack) is about to retire at age 65. Jack’s been with his company for over 30 years and has acquired a nice nest egg. If he takes his pension in a lump sum annuity payment, he’s looking at $470,000.

This sounds like an excellent option, doesn’t it? Jack and his wife can take their lump sum annuity, sell their northern property, pay cash for a home in Florida, and start pursuing their hobbies in the tropical south. Before we get too far in this daydream, let’s take a closer look.

Single Life Annuity Option

If Jack chooses a single life annuity, his monthly income will be just over $2,800 for the rest of his life. This might appear to be a great option, but Jack is married. With a single life annuity, his wife will receive nothing if he should die before her.

Joint and Survivor Annuity Option

Since Jack is married, he should definitely consider a joint and survivor annuity. With a 60% joint and survivor plan, the couple will receive monthly annuity payments of $2,500 for the duration of his life. This is only a $300 difference from the single life annuity option, but the peace of mind is enormous. Jack’s wife will not be left out in the cold should she survive him. With a joint and survivor plan, the surviving spouse will receive monthly annuity payments of $1,500.

Lump Sum Annuity Payout Option

Now that we’ve looked at actual figures from the single life annuity option as well as the joint and survivor annuity option, do we really feel as excited about taking a lump sum annuity? Let’s compare apples to apples and find out:

If Jack chooses the lump sum payout, he will need to earn over 5% annually to generate the same monthly payments ($2,500) for the next 30 years. After this amount of time passes, the funds will have been depleted. Jack will be in his 90′s. If he is still alive, this is a bleak picture indeed, but this scenario assumes that Jack has no other source of income. Let’s say that’s not the case. Jack might have a military pension, a separate 401k plan, investment property, or some other way to sustain his family, at least partially. If so, he might want to consider taking the lump sum annuity.

There are plenty of investment opportunities to take into consideration. Investing your lump sum annuity payout in real estate, a franchise opportunity, business partnership, or stocks are just a few options.

The bottom line here is to get you to see that, number one, you don’t have to make a hasty decision, and number two, you have to weigh out your own personal circumstances and goals. No one can do that for you. What’s right for a family member is not necessarily right for you. Keep checking with us here at our Lump Sum Annuity site. We’re here to answer your questions. Feel free to leave a comment or question and we will get back with you!

Choices in Pension Payouts: Lump Sum Annuity or Monthly Payments? is a post from: Lump Sum Annuity

When you are evaluating your finances and deciding whether to take a lump sum or annuity, it’s important to have all the facts. Whether you are a newbie or quite familiar with the options, you’ll find trusted and valuable information on LumpSumAnnuity.org.

Looking at Annuities:

This option provides you with regularly scheduled payments that will last for the rest of your life. If you’re married, this provides a safe option since your employer will make payments as long as you or your spouse are alive.

Annuity Pros: The advantage to the annuity option is, of course, the stability factor, and being certain of your budget. Opting for annuity allows you to plan your finances, vacations, bills, etc. without worrying about the ups and downs of the financial market.

That reliability of an annuity is a not only ideal for financial reasons but for emotional and peace of mind as well. As retirees, it is comforting to know that your finances are in order, and that income will remain stable throughout the remainder of your life.

Research has proven that retirees who have reliable pensions tend to be happier than those who do not.

Annuity Cons: Everything has it’s shortcomings, and annuities are no different. As enticing as a guaranteed pension may sound, it does have its shortcomings. Annuity payments, unlike Social Security, do not increase with inflation, and there is the possibility that budgets might become extremely tight over the years.

Another possible con to annuity is the fact that a stable monthly payment may not help much if you suddenly find yourself in need of a particular sum of cash to meet a financial need. One unexpected medical bill or home repair can throw your financial situation into the red if you are not prepared.

Pension payments are often spoken of as being a guaranteed payment, although actually they often are not. When you place your trust in a pension, you are counting on your company to make these payments year after year. All too often, companies that were once healthy have been known to fall into difficulty, causing them to renege on the promised pension plans. If this happens, the Pension Benefit Guaranty Corporation is supposed to step in, but with limitations that may still leave you without the income you once expected.

Lump Sum Pros: Taking the lump sum allows you have more control over your pension. With a lump sum, you decide how much income to draw for yourself each month. If an unexpected bill should come up, you can easily dip into your lump sum at any time. If you are a responsible, budget minded individual, this can be a perfect option.

Lump Sum Cons: Flexibility also has it’s possible downfall. With more available funds to manage, it can be easy to dip into the lump sum repeatedly without realizing that you have set yourself on a dangerous path. With a lump sum, once the money is gone, it’s gone.

With these being just two of the immediate options, you can see why it is important to wisely educate yourself on lump sum and annuities. Meeting with a financial planner to decide on possible investment options is always smart.

We at LumpSumAnnuity.org are here to provide you with reliable information for a financially successful future. Please contact us through our comments section with specific questions you may have and check back often for the latest information.

Welcome to Lump Sum Annuity is a post from: Lump Sum Annuity

Retirement is a part of every salaried person and much before his retirement he has to decide about his structured income after retirement. It is here that Lump Sum Annuity comes into picture.

This is how this scheme works. During the tenure of service, it is just and natural that every employee saves some money for his future. He has to invest these savings so that after his retirement, he gets some money every month which he can use for his day to day needs. To encourage the employee to save, some companies have instituted what is called as pension scheme. The employee, instead of investing his amount elsewhere can invest the amount with his employer who in turn would pay him Lump Sum Annuity. This Lump Sum Annuity is paid at a pre fixed percentage every month for the rest of the life of the employee. But the employee has to decide whether to invest with his employer or to withdraw the savings for better investment. Once this decision is taken, it is normally irrevocable.

Normally, the company pays him a predetermined percentage as Lump Sum Annuity. But, this Lump Sum Annuity or pension may diminish in terms of its intrinsic value. This is particularly true when there is inflation. Presuming that the inflation rate is 5% annually, in the next 10 years, the real value of Lump Sum Annuity would have substantially reduced. On the other hand, the investment market may be more favorable and investing in the open market could fetch more benefits than the Lump Sum Annuity. For example, investing in Shares could be more beneficial. But it has an element of risk with it. Unless the person is experienced in the operation of the stock market, this investment is not safe and such persons could opt for Lump Sum Annuity. There are also cases where the employee may find it necessary to withdraw the savings to pay his debts or law suits, medical expenses, etc. Therefore before opting for Lump Sum Annuity, the employee has to think carefully, and he should analyze the pros and cons. It is advisable that he should consult a financial planner.

In addition to this, there are many finance agencies and investment companies including banks who offer Lump Sum Annuity Plan at different rate structure. Some of these plans are also growth investment plans with assured Lump Sum Annuity in addition to some health coverage plans, etc. Some investment plans include payment of Lump Sum Annuity to the spouse or any other nominee either at the same rate or at a revised rate. As an alternative, some retired persons may prefer to invest the bulk in developing real estate property. This type of investment has one advantage; the real value of the property increases and at the same time, with proper planning he can get some returns from the investment made on real estate property if it is leased on monthly rent, etc. The return he gets as rent every month may even be equal to the Lump Sum Annuity which he would get from his employer.

On the part of the employer or the financial agency offering this Lump Sum Annuity, the amount is calculated using the estimates made by a qualified actuary. The actuary calculates taking the average life expectancy, growth rate of funds and many other factors into account before deciding on the Lump Sum Annuity which could be offered to the pensioner.

There is another category of people who are not really dependent on the Lump Sum Annuity for their retired life. Such retired persons may choose lump sum investment plan. In this plan, the person encashes his pension with some investment company. The company will pay a sum which is slightly less than the face value of the pension amount and the difference is the profit for the company. These amounts are normally invested in real estate or in franchise business. But, in this case, the pensioner should ensure that the return on the investment will cover the discount recovered by the company.

In all these investments, a wise decision is all that matters. But many people do not have thorough knowledge of the investment mechanism. They may not be aware of the financial market trend, the health of the financial institutions where investment is proposed to be made, etc. It is here that the role of financial advisers or investment advisers comes into play. They advise the investor on the appropriate investment plan so that the pensioner gets his Lump Sum Annuity or other appropriate investment plan. But it is the financial or investment adviser who can give the right type of advice depending on the need of the investor, his financial propriety, etc.

Lump Sum Annuity is a post from: Lump Sum Annuity