Never say never—but (almost) never convert a defined benefit pension to an annuity, said Sheryl Garrett, founder of the Garrett Planning Network, a financial planning firm based in Eureka Springs, Ark.
Most workers today would love to have the benefits of a defined benefit pension plan with guaranteed monthly payments for life, but diminishing numbers of workers have this kind of plan, Garrett said in an interview with Financial Advisor.
“Iif you are lucky enough to have a defined benefit plan, don’t give that up for a lump sum payment that is rolled over to an immediate annuity, even if the annuity has a guaranteed monthly payment for life. You already have that,” she said.
Some advisors convince pension holders to convert their private or public pensions to an annuity. They often say the company supplying the pension could declare bankruptcy or the municipality or state could fall behind on pension payments, as many do.
But Garrett has faith that the federal government would bail out any bankrupt industry to cover its pension payments, as it has in the past.
“The advisor who recommends rolling a defined benefit pension plan into an annuity is probably one who wants to manage the money, thereby earning money for himself,” she warned. “Anyone fearing a bankruptcy might interrupt their pension should check to see if the pension is insured, either through the government or privately, before taking any action.”
Garrett’s personal experience revolves around a large telephone company that offered lump sum buyouts for pensions in exchange for early retirement to relatively young workers. “Keep the money in the pension plan if you are given that option and you will end up with more money in the end. The fees and management costs of an annuity will eat into any payments you might get,” she said.
In the above situation that affected people she knew, the telephone company went bankrupt, but the pensioners who did not take their money out still got their pension benefits, Garrett said.
“The instances where money is coming out of a defined benefit plan and into an annuity are driven by an advisor’s greed and by pensioner’s ignorance,” the planner said.
Pensioners need to know everything about their own pension plans and whether there is any chance a bankruptcy of the company or government entity will affect the pension payouts, she said. They also should know all fees and the real potential income from any annuity that is being considered.