Portable Pension Lump Sum Calculation

klauApril 17, 2013

I'm eligible to receive a lump sum payment for the portable pension from a company I used to work for. Due to the decline in interest rate, my lump sum payment has jumped 30% since last year. According to the company website, the segmented corporate bond interest rates used for commencements in 2013 are .96%, 3.57% and 4.58%. I'm considering to take the lump sum payment now and have a few questions:

- How often do these corporate bond interest rates change? My pension website kind of suggests that these rates change once a year.

- If these are annual rates, does it mean my lump sum stay the same for the rest of the year? Will the lump sum change after my birthday?

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I don't know the answer but we have been through something similar to that. Our decision was whether to cash in our retirement or draw on it after he turned 70. I called my accountant and she called back with 5 options. We choose one that let us cash it in with a good tax break and we could have control of our money. The point is you need to talk with an accountant to see how you stand tax wise.

    Bookmark   April 17, 2013 at 10:00PM
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These rates are set by the Pension Benefit Guaranty Corporation, a US government agency, and are determined on a monthly basis. So I believe your lump sum payment could be different by the time your birthday rolls around but I'm only guessing. Maybe you should contact the benefits department at your former employer?

    Bookmark   April 18, 2013 at 2:44PM
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I am a pension actuary, so I am very familiar with the mechanics of the calculations. Each plan has its own rules as to how often the rates change, but usually it is annually. You need to look at the plan description to see what the date is, or of you have a benefit estimate that may tell you when the rates change. It is not always tied to the plan's accounting year.

The rates are no longer set by the Pension Benefit Guaranty Corporation, they are published by the IRS and can be found on their website under the retirement plan section. You are looking for the 417(e) rates, but the. The IRS computes them based on corporate bond rates. If the interest rates go up, your lump sum will go down.

Your benefit amount may change on your birthday or it may change monthly - again this depends on the plan rules and procedures. This change is not due to any change in the interest rates but it is to reflect the fact that you are getting older. The age adjustment usually causes your benefit to increase over time. It should go down only if you are past normal retirement age and still working and your plan has a suspension of benefits clause. In that case, you will be notified in advance that you are losing your pension benefit for any month that you remain employed.

Whether or not the lump sum is a "good deal" depends on a number of factors - such as your heath (do you expect to live longer than the actuarial tables would predict), your financial/tax situation, how comfortable are you with managing/investing the funds?

Taking a lump sum payment shifts the risk/reward from your pension plan to you - so you need to understand the risks.

Here is a link that might be useful: Lump Sum Interest Rates

    Bookmark   September 11, 2013 at 10:29PM
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