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What is a Pension Buyout?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 18 September 2016
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A pension buyout is a financial transaction in which the ownership of assets associated with a pension plan is transferred to a new owner. In many cases, this process involves the sale of those assets to an insurance company that can assume the long-range risk associated with the plan. At other times, a pension buyout may refer involve the dissolution of a pension program, necessitating that the participants in the fund receive some type of disbursement in order for the buyout to be complete.

When the pension buyout process involves the sale of the plan assets to an insurance company, both the assets and the liabilities associated with the plan become the property of the new owner. This means that the insurance company will be responsible for managing the assets so that profits are earned and also making sure that any debt obligations held by the pension are settled according to the terms related to each debt. In some cases, this means that the insurance company may choose to sell some assets as a means of providing payoffs to pension holders who will no longer be associated with the fund.

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When an employer chooses to withdraw from a pension fund due to some type of buyout, this normally leads to the need for some type of settlement with the enrolled employees. The process used to cash out pension funds often includes several options. In some cases, employees can exercise the option to roll the amount of the pension into some type of personal retirement fund, including an Individual Retirement Account (IRA) or an Individual Savings Account (ISA), or possibly even an independent pension plan that is not affiliated with an employer. A second option is to receive either a lump sum payment or a series of payments over a period of one or two years. Governmental regulations regarding the pensions and the funds due to plan members will dictate the range of options available as part of a pension buyout, along with specifying what types of taxes or penalties may be associated with each option.

With most pension buyout situations, opting to receive some type of cash settlement will result in the assessment of taxes and possibly a penalty. The amount of taxes due as well as the total of the penalties will vary, based on the way that the pension is classified in the nation where the pensioner resides, and the total amount of the settlement. In some cases, the fund itself will withhold the taxes and penalties and forward those amounts to the appropriate tax agency. When this is not the case, the recipient of the disbursement is responsible for reporting and paying any taxes or penalties owed on the funds received.

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