Why taking a lump sum for your pension might lose you money

If you currently have a monthly pension plan and have been approached about being bought out for a lump sum, or you’ve been given the choice between a lump sum pension plan or a monthly one finance experts say monthly is the way to go.

“The bottom line is the insurance company knows that if you live your normal life they’re going to pay more out than they are if they buy out plain and simple,” said David Edwards, an accountant with over 20 years of experience.

The reason businesses will save money if they buy you out is because people are living longer than they used to.

Currently businesses have to structure their pension plans on life expectancy charts that were constructed back in 2000.

However, starting in 2017 the IRS says employers will adopt new charts with updated life expectancy for men and women compiled by the Society of Actuaries.

Edwards said if they’re offering you a lump sum it isn’t because they’re interested in your long time security.

“Now if you are going to die soon and you took that pot of money you would end up better off but if you live your normal life span then most likely you’d be better off leaving the money in the plan,” Edwards said.

According to the social security administration right now the average life expectancy for a man turning 65 this year is 84 years old and for women 87 years old.