PLAN FIRST: Making the Best Decision about Pension Offers. Annexus. All Rights Reserved.

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Making the

Best Decision






I. Providing a Better Plan

for Your Pensions

Why You Need to Plan Before Accepting a Pension Offer Thousands of Americans are facing a decision that will impact the rest of their lives after work: whether to accept a lump sum payment of their pension or elect for monthly payments. Unfortunately, many of them will make the wrong decision and negatively impact their retirement future because of poor planning or no planning at all. Even more alarming is the fact that many advisors lack the information and the tools to help them make such a critical and time-sensitive decision.

This compact guidebook, Plan First: Making the Best Decision about Pension Offers, is intended to be used with your advisor as an essential financial planning tool to help you assess your needs and desires for life after work, calculate foreseeable and unforeseeable costs, better understand the options available through the pension offer and, ultimately, help you choose which option best suits your circumstances.

Although this guide can be useful to assist with retirement financial planning that pertains to pension offers, this material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for accounting, legal, tax or investment advice. Please consult with a professional specializing in these areas regarding the applicability of this information to your situation.*

The Options in a Nutshell

Large companies offering traditional pension plans are at a crossroads today. Many of them are facing the prospect of not being able to deliver future retirement benefits to their employees because of a deficit in pension plan assets. In an effort to lighten hefty balance sheets and reduce the likelihood of future unfunded pension liability, they are now offering employees like you an alternative to traditional lifetime annuitized payments: a one-time lump sum benefit payment.

At first glance, the lump sum option may seem like a tempting offer and a win-win situation for everyone.


You receive your well-earned benefits and don’t have to speculate about whether your pension funds will be forthcoming from the company (especially given the volatility of the economy), and the company is able to reduce plan assets and adjust the balance sheet deficit. The company further benefits because the more lump sum payments made, the more likely they will receive a favorable interest rate assumption (which is a forecasted estimate) and a generous extension to remedy the unfunded pension liability (as opposed to facing sanctions and other expensive punitive measures for having an unfunded pension plan).

You may also elect to take your

lump sum benefit and purchase

an annuity with a guaranteed

lifetime income rider.

The other option includes selecting a monthly distribution plan to secure an income stream in retirement and diminish the chance of outspending your nest egg. According to a 2011 AON/Hewitt

human resources survey of 500 large U.S. employers, 16 percent offered their employees an “in-plan

retirement income solution” versus the lump sum option. Another 22 percent indicated that they planned to offer this option in 2012.1

These retirement income streams or distributions can come from income annuities purchased for you by the company. You may also choose to take the lump sum and purchase one of several types of income annuities such as a deferred annuity, immediate annuity or fixed indexed annuity with guaranteed lifetime income riders. Deferred annuities begin distributions after a designated date in the future, whereas immediate annuities are set up to start distributing income almost immediately after purchase.

Annuities with guaranteed lifetime income riders can provide the best features of both lump sum and annuitized monthly options by offering accessibility to

cash for contingencies, guaranteed lifetime income, accumulation growth, inflation-indexed income, joint survivorship with 100% remainder to surviving spouse and a lasting legacy for beneficiaries.

Many plans offer joint and survivor spouse options that allow for the surviving spouse to receive a portion of the benefit remainder. This also applies to both the deferred and immediate annuity. However, very few offer a joint and 100% survivor option (where the surviving spouse receives 100% of the benefit remainder). In most cases, this means a surviving spouse will see their pension income drop and their Social Security income drop upon the demise of the first spouse. However, an annuity with a guaranteed lifetime income rider is designed to offset any such decreases.

This is why careful consideration must be given to everyone’s unique circumstances—especially yours. This is a decision that should not be made at first glance or put off until the last minute.

Both the lump sum and the annuitized option come with their own risks and advantages. Without professional insight and informed planning, the long-term consequences from making the wrong decision could have a devastating impact on your future. Although IRS regulations require the disclosure of “relative values” expressed in either percentages, monthly amounts or lump sum to help you with comparing the settlement options, these relative values can oftentimes be difficult to understand— even when accompanied with written explanations. With the assistance of a financial advisor and a licensed tax or legal professional, those considering pension offers should carefully review the various factors that should be discussed, assessed and calculated before choosing a settlement option. Your financial advisor acts as your personal “quarterback” to help you navigate the field of retirement planning and works with other players (such as tax and legal professionals) to strategize the best plays for your retirement.



The most important factors that will help formulate a winning strategy for choosing the best option for your retirement include:

Health and life expectancy issues. Perhaps the most important factor that has to be considered and weighed is longevity or life expectancy. Life expectancy is the age at which half the population has survived and half is deceased. The longer your life expectancy, the greater the value needed for lifetime income. A longer life expectancy also increases exposure to the effects of inflation and the likelihood for need of additional cash sums.

If you’re in poor health, then you’re probably better off with the lump sum (although there is no certainty that today’s health issues will translate into shortened life expectancy). Conversely, if you’re in good health, you’re probably better off choosing a life annuity for sustained income. According to actuarial longevity tables, women live longer than men on average. Family and medical history should also be factored in order to assess your longevity.

Taxes. Monthly income is taxable—period. The lump sum will eventually be taxed, unless it’s left to charity. Distributions from the lump sum can be more flexibly managed to address things like “bracket topping” (determining how much of income from the lump sum will be placed in your tax bracket to top it off), taxable Social Security and deductible medical expenses.

Age. There may be supplements to the pension’s lifetime income payments based on age. These typically coordinate with Social Security and may decrease as you age.

Risk Tolerance. Usually, there’s no cost-of-living adjustment (COLA) to the monthly income options without additional riders. This can expose you to inflation risk. Fixed monthly income can also limit liquidity, that means you may not have another opportunity to withdraw a lump sum of cash. With the lump sum option, there is also the increased risk of loss of principal, as well as overspending or outliving your assets.

Estate Planning/Legacy. Lifetime annuitized income ceases at death, whereas a retirement option like an IRA or an annuity with guaranteed lifetime income benefits can be left to your beneficiaries.

Income Flexibility. You may have other sources of income and may not require the immediate income offered by your company pension. With this flexibility you have more options. One option is choosing an IRA rollover and letting it accumulate until needed. Another option is selecting an employer-provided lifetime monthly income from an income annuity. Usually, the purchase of these income annuities are made by the employer according to the income annuity that offers the highest income rate. An income annuity differs from a fixed indexed annuity with a lifetime income rider in that the income annuity converts 100% of the lump sum into income. This means there will be no option for legacy remainder and no access to additional cash needed for

contingencies such as long-term care expenses. As mentioned previously, a third option available to you includes a structured lifetime income plan with the purchase of an indexed annuity with a lifetime income rider that is less restrictive. This option provides lifetime income through a Guaranteed Lifetime Withdrawal Benefit (GLWB) or Guaranteed Minimum Withdrawal Benefit (GMWB), inflation protection, liquidity and legacy benefits.

However, if cash is needed for college expenses, parental long-term care or other expenses, then the lump sum option placed in an annuity with income rider may be more suitable for your needs.


II. Anatomy of the Offer

Analyzing Your Offer and How it will Affect Your Retirement Lifestyle

Name: __________________________________________________________________________________________ Spouse: ________________________________________________________________________________________ Address: ________________________________________________________________________________________ City, State, Zip Code: ____________________________________________________________________________ Email: __________________________________________________________________________________________ Employer: ______________________________________________________________________________________

Question Retiree Spouse

What is your gender? What is your age now?

What is the relative health of the retiree? a. Excellent health, longevity in family.

b. Good health, no serious health conditions, normal height/weight.

c. Average-to-fair health, meds, height/weight abnormal.

d. Poor health, prior or current medical conditions. What about family history (i.e. health, longevity)?

How long will you live?

The Offer Elements

What is your offer commencement date/date of your retirement? . . . ___________

Lump Sum Benefit:



Monthly Pension Benefit:

Monthly Amount (pre-age 62, including supplements) . . . $ ___________

Amount to Employee Amount to Spouse

Option 1 _____% Joint and Survivor $ _______________ $ _______________ Option 2 (Single Life) $ _______________ $ _______________ Option 3 _____% Joint and Survivor $ _______________ $ _______________ Option 4 _____% Joint and Survivor $ _______________ $ _______________ Monthly Amount (post-age 62) . . . $ ___________

Amount to Employee Amount to Spouse

Option 1 _____% Joint and Survivor $ _______________ $ _______________ Option 2 (Single Life) $ _______________ $ _______________ Option 3 _____% Joint and Survivor $ _______________ $ _______________ Option 4 _____% Joint and Survivor $ _______________ $ _______________ How will your retiree health coverage be affected? _________________________________________________ What is the election date? . . . ___________ What is the relative value? . . . . $ ___________

Advisor Note: The relative value amount may be expressed as a percentage, monthly amount or lump sum figure. Make sure when discussing with the client, that you also have a copy of the offer for better accuracy.

Assessing How this Pension Offer Fits into Your Retirement Life Plans

What are your planned expenses? Now $________ After demise of first spouse ( if applicable) $________

Average Expenses over the Years

Item All Consumer Units 55–64 Years 65 Years and Older 65–74 Years 75 Years and Older

Average annual expenditures $48,109 $50,900 $36,802 $41,434 $31,529

Food $6,129 $6,068 $4,558 $5,148 $3,873

Housing $16,557 $16,673 $13,015 $14,420 $11,421

Utilities, fuels, public services $3,660 $3,979 $3,402 $3,644 $3,130

Transportation $7,677 $8,111 $5,242 $6,086 $4,288

Health care $3,157 $3,859 $4,843 $4,922 $4,754

Entertainment $2,504 $2,683 $1,891 $2,341 $1,374


Inflation’s Impact on the Cost of Living over the Years

What are your other sources and amounts of income (excluding pension)? a. Spouse’s pension

b. Retiree Social Security c. Spouse’s Social Security d. Investment income (non IRAs) e. Rents, jobs, other

f. Value of other investable assets (e.g. trusts, brokerage accounts, IRAs)

What are your sources and amounts of income after first spouse’s demise? __________________________ What are the income gaps? ______________________________________________________________________ Can the monthly pension fill the gaps? ____________________________________________________________ What about non-level or contingent expenses? ____________________________________________________ What about long-term health care expenses? ______________________________________________________

$50,000 $30,000 $10,000 $70,000 $60,000 $40,000 $20,000 $0 $80,000

1 Year 5 Years 10 Years 15 Years 20 Years

$48,109 Inflated Value $53,103 $48,109 $60,081 $67,976 $76,909 Source: Annexus™



Question Retiree Spouse

Which statement most effectively sums up your/spouse’s wishes regarding a legacy?

a. I need to take care of myself (or my spouse and I) only;

b. I would like to leave whatever I (or my spouse and I) don’t use up to heirs;

c. I want to live off the interest and leave the principal and growth to heirs;

d. It is very important to me to leave a legacy to heirs.

Which statement most effectively sums up your/spouse’s view on flexibility of withdrawals?

a. I want my retirement income to be certain;

b. I want some of my retirement income to be certain, but would like some flexible income I can adapt to my needs;

c. I am comfortable with my other sources of retirement income, like my spouse’s pension and social security;

d. I want control over my assets and income flow as much as possible.

Which statement accurately reflects your/spouses’s attitude about inflation?

a. I am not concerned about inflation: I want safety of principal; b. I am somewhat concerned about inflation, but I am more

concerned about safety of principal;

c. Inflation will be a modest problem in the future;

d. I am concerned about inflation and its detrimental effect on my retirement.


III. Making Your Choice

Are you in poor health or do you have a terminal


Are you in relative good health with a family history of longevity?

Do you want to leave a legacy to beneficiaries?

Have you successfully invested substantial

amounts of money independently before?

Do you have a tendency to overspend your


Do you want quick access to cash for contingencies?

Do you want to guarantee the remainder amount goes to your surviving

spouse or other beneficiary?

Will this be your

primary income stream? Do you want guaranteed lifetime income?

Are you disciplined with

your spending budgets? Are you a single retiree?

Do you want monthly income with inflation indexing to protect against future increases

in the CPI? Will you have other

sources of income during retirement?

Do you want to guarantee the remainder goes to your surviving spouse or

other beneficiary?

Do you want joint survivorship so that 100%

of the remainder goes to your surviving spouse?

If yes to the above, then Lump Sum is your best choice.

If yes to the above, then Monthly Income

is your best choice.

If yes to the above, then Indexed Annuity with a Lifetime Income Rider is your best choice.

* This guidebook is meant to provide general information and is not meant to be a substitute for you and your client’s own local legal counsel or advice from a licensed tax professional. Annexus® shall have no liability or responsibility for any person or entity with respect to the implementation or use of any information provided in this guidebook. We encourage all recipients of this guidebook to work closely with their own legal and tax counsel before implementing any plan, concept, idea, strategy, tactic or suggestion that may be directly or indirectly obtained from this guidebook.

Do you want to leave a legacy to beneficiaries?

Do you want quick access to cash for contingencies?

Do you want guaranteed lifetime income? Do you want monthly

income with inflation indexing to protect against future increases

in the CPI? Do you want confinement benefits?

Do you want joint survivorship so that 100%

of the remainder goes to your surviving spouse?

If yes to the above, then Indexed Annuity with a Lifetime Income Rider is your best choice.


Annexus has produced the most revolutionary retirement income solutions available to consumers. Annexus® currently leads the industry with the highest number of product innovations benefitted by ten patents issued with twelve pending. It anchors the largest distribution network in the country comprised of the best and the brightest in the financial services industry including independent marketing organizations and elite advisors that provide wealth management, client management and practice management services.




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