When are pension lump-sum payouts offered?


Quick Answer

Employers opt for lump-sum payments when they want to encourage older employees to take an early retirement, according to Investopedia. If a company pays in lump sum, there is no need to pay for administrative expenses and insurance by the company, which provides the company better accounting returns.

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Full Answer

Paying by lump sum enables the company to eliminate pension payment and improve accounting gains, as Investopedia explains. Before making a decision about whether to choose a pension or lump sum, an employee should clearly understand the benefits and downsides of both.

Choosing pension payments means the individual receives a paycheck every month for life, ensuring a guaranteed income. On the downside, inflation negatively affects a pension, according to Bankrate. Practically explained, if the monthly payment is $2,000 and the inflation rate is 3 percent annually, it means the money effectively reduces to $1,488 within 10 years. In 20 years, the amount reduces by almost half. This has a huge impact on the recipient's spending power.

The risk of taking a lump-sum payment is that the recipient can lose the money quickly if it is not managed well. However, one of the benefits is that this type of payment does not incur a tax, according to Bankrate. Investing the lump sum in available projects also offers better pay at the end of the month in terms of returns.

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