Cashing Out Your Annuity: Familiarizing With Lump Sum Payments And Their Benefits

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Most of us will end up facing this dilemma sometime in our life: should we opt for getting monthly pension checks for life or a lump sum payment? 29% of Americans are fortunate enough to have company-funded pension plans. While getting a monthly cheque may seem tempting and a way to moderate how you may end up spending all of your money, you may actually be better off opting for lump sum payments. 

What Is a Lump Sum Payment?

A lump sum payment is a one-time payment for the total or partial value of an asset that is taken in lieu of recurring payments that would otherwise be paid out in frequent or irregular intervals. Depending on the type of pension plan that you have, the lump sum payment may be of an equal or smaller sum than the total of the recurring payments. The amount that you get will be dependent on the terms and conditions of your pension.

What Are the Advantages of Opting for Lump Sum Payments?

While you may think that getting monthly cheques may be more beneficial in the sense that you can moderate the amount of money that you are spending and saving, the truth is that lump sum payments offer many lucrative advantages as well. You should consider these advantages and weigh out your pros and cons when making a decision. Some of the advantages of opting for lump sum payments will include:

• monthly payments are not indexed for inflation. The rate of inflation from July 2013 to 2014 was 2.0%. The value of a dollar is constantly decreasing thanks to inflation, and $1,000 today will not be worth as much 10 years down the road. If you receive lump sum payments, you will be getting the entire worth of your payments and can invest accordingly. In comparison, if you opt for monthly payments, you may be actually losing purchasing power thanks to the power of inflation.
• federal income tax exemption. If you opt for monthly payments, you will owe federal income taxes every month. If you roll the lump sum that you receive into your IRA, you will only be taxed on the amount of money that you are required to take out at a later date. Generally speaking, this amount will be much lower than the taxes that you will pay on your monthly pensions.
• the power to invest. If you take lump sum payments, you have more power to invest the money in worthwhile ventures. Pretty soon that lump sum amount will grow, and you will be a lot wealthier in the long run.
• benefits for beneficiaries. You will want to read the fine print to make a better decision. Consider whether monthly payments end the moment that you pass away, and whether any relatives or family members can benefit or continue to receive payments that would have otherwise be in your name. Most of the time, the answer to that is no. If you take lump sum payments, you can distribute the money accordingly and place them in certain bank accounts to be given to beneficiaries upon your death.

Conclusion

While lump sum payments are able to offer numerous benefits, managing the money that you have can be rather difficult even for seasoned investors. If you decide to take lump sum payments, you will want to speak with a financial advisor in order to better familiarize with investment options that are available, and where your money should go in order for you to pay the least amount of taxes. With good management, you can make your money work for you and grow your financial portfolio. Click here for more information.

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27 August 2014