Reading Theo Francis’ “Pension tension: figuring out when to lump it”  in the WSJ, reminded me of the time when I had to make the decision, about five years ago. For what it’s worth, I’ll later give you some of my rationale for choosing to go with a pension, rather than a lump sum payment. But first I’ll try to summarize Theo Francis’ valuable points. (By the way, you may wish to read the Pension Advocacy section of this website as an introduction to this topic.)

His points include consideration of: • Is your advisor’s judgment clouded by the fact that a lump sum may generate asset management fees for him/her? • Given that PBGC (US pension guarantor) guarantees an annual pension of up to $49.5K at age 65, for most people the employer’s financial health may be less important; this is more of an issue for Canadians, where there is little (in Ontario up to about $12K according to my understanding) or no pension insurance. This is an advocacy opportunity! • Your personal health situation may be a more important consideration, i.e. if your personal life expectancy is less than average then a lump sum may be advantageous.

• Similarly, the age and health of spouse, if option exists for spouse to continue to benefit from some portion of the pension of the plan member

• Do you have any (disabled) dependents who have to be cared for past your death? This may influence you to consider taking the lump sum to invest and generate assets in support of the next generation.

Some additional considerations that went into my decision not to take the lump sum: • The funded status of my specific plan; suppose (though due to various lack of transparency issues it is usually difficult to determine exactly) that the plan is about 80% funded so one may expect to collect 80% of the benefit. • Taking a (low) lump sum offered by the plan sponsor, coupled with tax implications of the portion that could not be placed into an RRSP, may mean accepting a greater immediate loss than the 20% implied by the funded status of my plan; this, together with the previous point was probably the deciding factors in my decision to take the pension. • Taking the lump sum, may imply that you believed that there was a very high probability that your employer was going to go bankrupt (the market’s sentiment on this is usually visible on the share price) or that the integrity of the company management/culture was such that they will not top up the plan when times improve (you may find this unthinkable, based on your experiences with the company) • A pension is a form of portfolio diversification; you may not be able to get even close to the pension with a annuity from the lump sum; the pension was a form of longevity insurance that you could not purchase by other means

Only time will tell if I had made the right decision. My father passed away at 91, just as I was contemplating the pension vs. lump sum decision, so there was a theoretical possibility for a greater than average longevity for family reasons; if both my wife and I died young the pension income with our other assets that would have been more than adequate; however, if one or both of us lives well passed 85 (I was starting the pension at 55) then there was a greater risk of running out of funds(I could have taken a deferred pension to increase the amounts in later years, however the risk associated with the financial health of my employer, at that time, precluded serious consideration of that option)
If you have to make a pension vs. lump sum decision, the above list should at least get you started thinking in the right direction. This is a sufficiently complex decision, that it would be reasonable to get expert advice; but the final decision ultimately rests with you.