There are many factors to consider regarding employee pensions, annuities or other retirement plans. Care should be taken to understand fully the options and requirements of each plan when you are preparing to retire.
Deciding to retire early carries certain penalties. Assumption of these penalties may fall to the person overseeing the pension plan (pension plan administrator). However, until the early retirement becomes a reality the economic aspect of these penalties does not become an issue. Further, the penalties are impacted by rules put into place by local jurisdictions. Your attorney along with other neutral parties can determine how these penalties will be handled prior to instituting valuation procedures.
An annuity is a financial product that provides the purchaser with a set monthly income for a predetermined number of years or for the remainder of the owner’s lifetime. This income is calculated at a specified percentage rate. If the seller has the dates at which monthly payments begin and end and knows the benefit amount, the price of the annuity can be determined and a quote given. This may cause valuators or to assert that annuities are comparable to the current worth of projected payments from defined pension plans.
There Is a Difficulty
When an annuity company calculates a price quote, however, the company also figures in administration expenses, company profit, risks involved with fixed interest rates and other factors. Those expenses do not normally occur in standard pension plans, nor is the person receiving the pension impacted by them when he or she retires. This can cause the price of an annuity to be significantly lower than the present worth calculated in terms of current or average interest rates.
How Contributions Apply
Both private and public sector employers frequently expect or require their employees to designate part of their pay as a contribution to their retirement plan. Often the employer contributes as well, such monies being placed in an employee’s account as set up by the company and allowed to build as time goes on. These funds become available for withdrawal when the employee has spent sufficient time with the company to become vested. After that, upon leaving the company the employee may withdraw the money as desired.
Cashing Your Plan Out
Cashing-out of your retirement plan too early might not be the best way to make the most of its value. Employees who have long standing with the company may find this particularly applicable. In general, the amount of the plan’s current value is predicated on the value of future payments rather than the cash-out sum.