How to sell your pension benefits

A pension is a guaranteed periodic payment that is provided to former employees who have retired and worked the requisite number of years for a particular employer. And, because it is eventually owned by the employee after meeting certain requirements, a pension right is considered an asset from a legal perspective. Because of this aspect, the pension payment stream can also legally be sold for cash up front if a buyer is willing to buy the rights to the pension stream from the original owner. But is it the smartest approach to one's retirement? That depends.

The Pension Concept

A pension, technically known as a defined employment benefit, is the traditional retirement that was provided to employees who vested their time in a particular employer, usually 20 to 25 years at least. Once retired, the employee receives a monthly payment or stipend for service provided to the employer. Although once quite common, a retirement pension program has become fairly rare and is now only found in government employment and a small number of large corporations that have existed for a number of decades. Modern retirement plans are built on a 401k model and self-investment management instead.

Why Sell Your Pension?

The No. 1 benefit from selling off your pension is the ability to receive cash up front. For some, that opportunity is worth giving away a guaranteed income over time. The choice can be for a variety of reasons. There may be medical bills to pay, the seller may feel it's better to receive their retirement cash all at once to invest better, or the cash is wanted to make a big purchase right now.

What Are the Pros and Cons of a Sale?

The upside after the sale is that the money is yours, so there is no loan to pay back or collateral to give up later on. And, in some cases, you may not even need to sell your entire pension rights. Partial sales are possible as well. These limited term sales offer the best of both worlds where you can receive cash up front, wait a few years for the revenue stream purchased, and then you receive your normal pension again for the remaining years.

The downside of a pension sale means that you give away a steady income while you're alive for a limited amount of cash now, which is usually less than the worth of your pension at purchase time (although some may argue with inflation over time it could be more). If your fallback plan is Social Security and your own savings, you may eventually find you don't have enough monthly income left when you really need it in your senior years.

Why Deal With Buyers When I Can Do a Lump-Sum Payout?

It is true that most pension program offer a lump sum payout choice. However, this plan option usually has to be exercised by the employee prior to your retirement and separation from your employer. This is a one-time choice at retirement processing that can't be reversed later on. Nor is it allowed in a partial manner. Either you take a full payout at the separation date, or you receive your pension in monthly amounts over your life remainder.

What Are Typical Sale Requirements?

One of the most common requirements is that you, the former pension owner, need to retain a life insurance policy. This is coverage for the pension buyer to make sure there is some recourse if you happen to pass away before the value of the pension is received. Keep in mind, buyers will pay you a percentage of your pension value for the benefit of giving you cash up front. That means they expect to make a profit when they receive your pension payment. But this plan goes awry if you die and the pension payments stop. Other requirements may require you to have a particular credit score, have enough secondary income for you to live without your pension as a necessity, and be receiving a minimum amount of monthly pension to make the transaction worthwhile for the buyer.

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About the Author

Since 2009 Tom Lutzenberger has written for various websites, covering topics ranging from finance to automotive history. Lutzenberger works in public finance and policy and consults on a variety of analytical services. His education includes a Bachelor of Arts in English and political science from Saint Mary's College and a Master of Business Administration in finance and marketing from California State University, Sacramento.

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