Changing A&D Jobs? What to Do With Your Old Pension (The Lump Sum vs. Annuity Decision)

You just accepted a new offer at a dynamic space-tech startup or a different Prime Contractor. You are going through the offboarding checklist: handing in your badge, returning the laptop, and rolling over your 401(k). Then, you get a packet in the mail about your Defined Benefit Pension Plan.

If you are under 40, you might be surprised you even have a pension. While less common in the tech world, legacy A&D firms often still provide these benefits.

The packet usually offers you two choices:

• The Annuity: Wait until age 65 to collect $600/month for life.
• The Lump Sum: Take a one-time payout of $45,000 today.

When you look at the numbers, $600/month for life sounds like a lot more money than $45,000 once. But for a younger professional, the seemingly conservative option carries a different risk: Inflation Risk.

Here is information to consider before you decide.

Understanding Purchasing Power Risk

The annuity offer involves a fixed paycheck starting at age 65. If you are 35 today, that is 30 years from now.

The problem? Inflation.

Most corporate pensions are not inflation-adjusted. That $600/month will still be $600/month in the year 2055.

• Consider This: At 3% historical inflation, $600 in 30 years will have reduced purchasing power.
• The Risk: You are locking in a payment that may buy fewer goods and services over time due to inflation.

For someone closer to retirement, a fixed annuity might be suitable. For a younger individual, inflation is a consideration.

Lump Sum Considerations

If you choose the Lump Sum, you are taking the Present Value of that future income stream today. While $45,000 might not seem like enough to retire on, you have time for potential growth.

If you roll that $45,000 into a Rollover IRA and invest it in a diversified portfolio:

• Compounding: You have 30 years for that capital to potentially grow tax-deferred before you access it.
• Control: If you die, the remaining balance in an IRA can go to your beneficiaries. In many pension annuities, the payments may stop at death unless you elect survivor benefits.

Important Note: Taking the lump sum transfers the Investment Risk from the company to you. If the market declines, you could end up with less. Diversified markets have historically provided returns that have outpaced inflation over longer periods, which a fixed, non-indexed pension does not offer. Past performance is not indicative of future results.

The Tax Implications: Direct Rollover vs. The Check

If you decide to take the Lump Sum, how you take it matters for tax purposes. The paperwork will ask if you want the money paid to you or an IRA.

• Potential Issue: If you ask for the check to be mailed to you, the company is legally required to withhold 20% for federal taxes immediately. You then have 60 days to deposit the full amount (including the 20% they kept!) into an IRA to avoid penalties.
• The Recommendation: To avoid immediate taxes and penalties, consider a Direct Rollover (or Trustee-to-Trustee Transfer). The check is made out to "Custodian FBO [Your Name]" and sent directly to your new account. This avoids withholding, immediate taxes, and potential penalties. Consult with a qualified tax professional.

Why Companies Offer Buyouts

Why is your old employer offering you this cash? Likely because managing a pension fund is expensive for a company. They have to make projections about life expectancy and market performance. By writing you a check today, they reduce their long-term liabilities.

Sometimes, this can benefit both parties. They get a cleaner balance sheet; you get control of your capital.

Summary

If you are nearing retirement, a pension may provide a source of income. But if you are mid-career, a frozen pension may be affected by inflation over time. Carefully consider your options. Review the potential future value.

If you need help comparing the Internal Rate of Return on your pension offer vs. a rollover, we can discuss relevant factors during a planning session.