What is a pension buyout?


Quick Answer

When a company offers a pension buyout, it means they are offering to pay a one-time lump sum to a retiree rather than paying that person a monthly pension, says DailyFinance. While this buyout is fast and guaranteed money, there are still drawbacks that must be considered.

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Full Answer

Although pensions are paid out monthly by companies for the course of a person's post-work lifetime, sometimes taking the lump sum buyout is a better plan because it guarantees receiving the money rather than potentially receiving it in the future, according to Daily Finance. However, if a company suffers financial trouble at some point after an individual has retired, pension payments could be affected and there may not be money to make payments. Taking a lump sum also gives the retiree the opportunity to invest that money in a personal retirement account. Therefore, the buyout can be a good option because it is money that is available immediately. However, Daily Finance also points out potential drawbacks to taking the buyout. If a person comes from a long-lived family and life expectancy is high, getting payments every month means that more money is paid out than would be if it was given as a lump sum. In addition, taking the lump sum could affect what taxes have to be paid at a later stage.

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