Pension lump sum rules

Written by angela marcum
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When receiving retirement funds, you may have many options, especially when it comes to your pension. The two main choices are taking a lump sum or instalments, also called annuity payments. Rules governing pensions can affect whether or not you actually have a choice in how to receive these funds, the amount of taxes you may pay and when you meet eligibility requirements.

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Early Withdrawal

Your employer may not have to allow you to receive pension funds before retirement age and it will depend on the individual benefit plan. When funds are disbursed early, penalties will apply. This usually constitutes an additional 10 per cent in taxes. Upon early disbursement following a layoff or the closing of a company, you may lose entitlements to specific programs designed for dislocated workers, such as unemployment benefits.


Tax will apply to the lump-sum pension payment. In most cases, you will classify this as ordinary income and pay about 20 per cent in taxes. To avoid this, you can roll these earnings into an Individual Retirement Account, or IRA. Rolling funds into an IRA can prevent you from claiming future tax breaks and incentives, though. Special taxation rates may apply, depending on your year of birth and classification of funds. Qualifications for these programs will vary by plan and type of investments.


You must meet the eligibility criteria provided by the employer and law before receiving a lump-sum payment. Employers often establish their own set of guidelines. Limitations on withdrawing funds can include age, number of years worked for the employer, disability status and the type of pension plan. When enrolling in such a plan, you should receive full disclosure regarding this information in writing.


The Pension Protection Act of 2006 defines the terms regarding the eligibility of lump-sum and annuity options for employees. An employer-sponsored pension does not necessarily offer the option of receiving annuity payments. If your employer provides a defined contribution plan, it does not have to allow instalments. However, the defined benefit plan requires the employer to offer annuity payments. Information regarding your individual account type and other disclosures should be located in your summary plan description.

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