Pension going away? Here's how to protect your savings

Defined benefit ("DB") retirement plans—often referred to as pension plans—are not as common as they once were. And some plan sponsors are expected to terminate their plans in the near future.

If this happens to your pension, you'll probably be offered a lump-sum payout from your plan sponsor as an alternative to the plan's annuity benefit. And you'll face an important decision: What should you do with the money?

If you find yourself in this situation—whether because your pension plan was terminated or for a different reason, such as retirement or changing jobs—you generally have three options:


Put the money to work. To keep your savings earmarked for retirement, you could invest your pension assets through a rollover into a traditional IRA or a 401(k) plan sponsored by your employer. Either approach can keep your money working tax-deferred through a variety of investment options. This option can be particularly beneficial if you're in the early stages of your working career. (See "Rollovers made easy" below for more information.)


Select an annuity. An income annuity may be an attractive option if you're looking for cash flow in retirement and you're concerned about outliving your savings. But annuities aren't for everyone, and the decision to invest in an annuity is generally irreversible. Your existing DB plan will probably offer annuity options, which usually require you to take your entire distribution as an annuity. Another option would be to consider rolling your distribution into an IRA and allocating a portion of your funds toward the purchase of an annuity. Learn more about lower-cost annuity options available through Vanguard.


Take a taxable distribution. It may be tempting to receive your money immediately. But be warned: A lump-sum payout that isn't rolled over will be taxed as income. If you spend it now, it'll reduce your income in retirement. Even if you invest it in a nonretirement account, it will no longer grow tax-free.

"There are advantages and disadvantages to each approach," said Evan Inglis, chief actuary in Vanguard's Strategic Retirement Consulting group. "However, the tax consequences of taking an immediate distribution mean that it's usually not advisable. That's why we generally suggest that pension plan participants roll over their assets or select an annuity."

Performing a rollover couldn't be simpler or more straightforward. At Vanguard, you'll get hands-on guidance from an experienced rollover specialist who can help you get started, answer your questions, and offer ongoing support for your financial goals.

To find out how to put a pension plan distribution to work—or simply to learn more about retirement rollovers—call us at 800-523-9442 or visit the rollover section of our site.


Note:
All investments are subject to risk.

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