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What Are the Pros and Cons of a Commutation of Pension?

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  • Written By: Geri Terzo
  • Edited By: PJP Schroeder
  • Last Modified Date: 20 September 2016
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An employee could work the majority of his or her life in order to earn a proper retirement in a pension plan. Once retirement age nears, that individual has a very personal decision to make. The commutation of pension assets is one of those choices, and it is a cash option. When a pension plan member commutes a pension, he or she receives a lump sum payment as opposed to annuity-style payments for the rest of his or her life. A commuted pension may help a retiree achieve some lifetime goals, but it could leave him or her strapped financially at some point in the future.

In order to decipher the pros and cons of a commutation of pension assets, it is helpful to look at the different possibilities. The alternative to commuting a payment is to accept annuity-type payments upon retirement for the remainder of the retiree's life. Primarily, the benefit here is having the security of guaranteed cash payments for life. A consideration with an annuity-style pension is that, if the retiree dies before a spouse, that spouse will only receive a percentage of the total pension payments.

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The commutation of pension assets can be an exciting option. Retirees receive lump-sum cash payments worth the current value of future payments. If a retiree has a backup plan, such as equity in a home to live on later in life should the pension assets run out, the commutation of pension assets could be a viable option. Commuting a pension could afford a retiree a lifestyle that could never be afforded with traditional pension payments.

If traveling is a goal, that can be an expensive way to spend retirement years. Receiving a lump-sum payment can certainly help support this goal, making it an affordable proposition. The challenge here is that the retiree could diminish all the pension assets traveling. This is where home ownership comes into play.

Taking the commutation of pension assets is more comforting if the retiree has assets to fall back on, such as equity in a home. Once the traveling years are over, the retiree may consider selling a residence in order to have enough money to sustain the rest of his or her life. To keep expenses down, the retiree may opt to rent an apartment going forward so there is enough money for other expenses. The downside to selling property is that there can be no estate planning and a retiree cannot leave any property to a beneficiary.

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