When it’s worth hiring a financial advisor for your pension

Pensions were once a common workplace benefit, but these days, they’re increasingly rare among non-government workers.

In March 2022, just 15 percent of private industry workers had access to a defined benefit plan, more commonly referred to as a pension, according to the Bureau of Labor Statistics.

If you’re retiring with a pension, you probably have questions about how it fits into your broader retirement plan. Working with a financial advisor can help you navigate the ins and outs of your pension, including payment options and tax implications.

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What is a pension?

A pension is a retirement plan provided by employers that pays income to workers in retirement.

Unlike a 401(k) plan, employees with pensions don’t need to decide how much salary to defer to the plan or how to invest contributions. The size of your pension is based on factors like years of service and salary history.

These days, most employees with pension plans work for federal, state and local governments, along with branches of the U.S military. 86 percent of state and local government workers had access to a pension in March 2022.

How a financial advisor can help with your pension

While funding a pension may seem straightforward, there are important decisions to be made as retirement nears, especially when it comes to choosing a payout option.

Deciding on a lump sum vs. monthly payment

Some employers automatically enroll workers in monthly payouts for their pension. But you might have the option of choosing a lump sum distribution, or even electing a combination of the two payment methods.

A lump sum provides a single large payment upfront, which can be enticing for some retirees who want immediate control over their funds.

However, managing a huge infusion of money can be cumbersome. You must pay the total income tax due when you file your tax return for the year you make the withdrawal. A lump sum may also push you into a higher tax bracket.

You might have the option of rolling the funds into a tax-advantaged account, such as an IRA, where you could defer taxes until withdrawal. But then you’ll need to decide how to invest the money within the account.

On the other hand, opting for monthly payments ensures a steady income stream throughout retirement, reducing the risk that you’ll run out of money. It can also help spread your tax liability out over several years.

A pension financial advisor can help you weigh the pros and cons of both options. While a stream of payments usually makes sense for the average person, recipients who are ill or retiring early may want quicker access to their funds. An advisor can help you explore both options based on your specific circumstances.

An advisor can also navigate the state tax rules on pension income. Some states tax pension income while others don’t.

Choosing joint or survivor benefits

If you opt for monthly payments, you can choose to receive joint or survivor benefits from your pension or single-life payments.

With joint or survivor benefits, your named beneficiary (usually a spouse) continues to receive pension funds after you pass away. This is in contrast to the single-life payout option, where payments end once you die.

Opting for joint or spousal benefits usually lowers the monthly payment you receive, since funds must stretch the rest of two peoples’ lives instead of just one.

Depending on your situation, joint or survivor benefits might make sense, especially if your spouse receives a small Social Security benefit. A financial advisor for pensions can walk you through all your options so you can make your decision with confidence.

Understanding your overall financial plan

Your pension is just one piece of your bigger financial puzzle. As you approach retirement, having a clear, well-thought-out plan can prepare you for the next chapter of your life and help you avoid costly pitfalls.

An advisor can create a personalized financial plan for you, taking into account your pension, as well as other sources of retirement income such as Social Security benefits. They can help you identify potential costs you’ll face in later life, such as long-term care expenses, and help you plan for them.

With the right expertise, guidance and personalized recommendations, you can create a financial plan tailored to your specific needs.

Bottom line

As you approach retirement with a pension, important decisions must be made. Choosing between a lump sum payout or monthly payments, and deciding on single-life or joint or survivor benefits can have long-lasting impacts on your financial future. Thankfully, you don’t need to navigate it alone: A financial advisor can help. They’ll offer personalized advice, helping you weigh the pros and cons of each option, clarifying tax implications and ensuring your pension decisions align with your broader financial plan.