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By Jason Stipp and Christine Benz | 01-23-2013 04:00 PM

Pension Lump Sum or Annuity: 5 Swing Factors

Morningstar's Christine Benz highlights key considerations in the decision to annuitize a pension or take a lump-sum payout.

Jason Stipp: I'm Jason Stipp for Morningstar.

Pensions are definitely a dying breed for today's working force, and those who do hold pensions may have concerns about pension funding and pension health, all serving to up the stakes on that important decision of choosing a lump sum from a pension or to annuitize that pension.

Here to offer some insights on making that decision is Morningstar's Christine Benz, our director of personal finance.

Thanks for joining me, Christine.

Christine Benz: Jason, great to be here.

Stipp: So, there are concerns about pension health, both public pensions and the fewer and fewer private companies that offer pensions. Some folks may look at that, be concerned about a pension, and just want to take that money as a lump sum and run. But you have a few considerations here. The first one we'll talk about is the all-important pension health. What should I think about if I have a pension, and how should that potentially color my decision?

Benz: Well, you are right, Jason, most people do take the lump sum because they want to disentangle themselves from their employer. The key thing to look at is the health of that pension, and you can do your due diligence on this topic in a couple of different ways. Your employer should be providing you with what's called a "pension funding notice" that gives you a sense of how fully funded your pension is or is not.

If you can't get your hands on that pension funding notice, look for a Form called '5500." This is something that your employer must file with the government, and you can check this out on a website called FreeERISA. You may need to sign up and provide a little bit of information, but then you can download pension information specific to your individual pension.

Stipp: So, an important thing in making this decision also is that if you choose to annuitize that pension, it's not like you have no protections from possible financial problems with your employer. There are some protections in place for those folks that annuitize.

Benz: There are, and that's what the Pension Benefit Guaranty Corp is there to do. It's there to backstop pensions that run into funding difficulties. And the PBGC has done a pretty good job to-date helping out some of these troubled pensions. But I think the big concern going forward is with these black clouds hanging over so many pension systems, whether it will be able to continue to do so. So that's where some investors have been concerned. PBGC has been pretty good to-date; will it always be in the future?

Stipp: So, first consideration is getting a sense of your pension's health and thinking about the guarantees and the strength of those guarantees potentially. The second important consideration are the other income sources that you have. So, how does that play into this decision?

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