How to Invest a Lump Sum Pension Payout - SmartAsset (2024)

FAQs

How to Invest a Lump Sum Pension Payout - SmartAsset? ›

Immediate annuities

A lump sum could be invested to include a prudent allocation of equities and TIPS (Treasury Inflation-Protected Securities) to help assets have a better chance of keeping up with inflation. Or couple a pension with a portfolio of investments to provide a combination of both.

If you decide to take a lump sum in lieu of monthly pension payments, consider rolling it over to an IRA. A direct rollover from your employer's plan to your IRA provider (trustee to trustee) will not be subject to immediate taxation and may be the best way to preserve the tax-deferred status of this money.

Lump-sum distributions allow individuals to spend or invest the money. People who take a lump sum may outlive their money, while traditional pension payments continue until death.

Start paying off the debt with the highest interest rates and work your way down to the debt with the lower rates. If you cannot pay all your high-interest debt with your windfall, pay as much as possible and focus your attention on other high-interest debt.

Put it in a bank account - If you think you'll be spending money, then you could just keep it in your regular bank account. Invest it - By investing your money you could allow it to potentially grow. Most investments, such as shares and funds, offer potential returns on your money over a longer term.

Transfer or rollover options

You may be able to defer tax on all or part of a lump-sum distribution by requesting the payer to directly roll over the taxable portion into an individual retirement arrangement (IRA) or to an eligible retirement plan.

STP for gradual entry: Investors with a large sum but hesitant about market timing can utilise a Systematic Transfer Plan (STP). This strategy initially parks the lumpsum in a low-risk liquid fund. Then, regular, pre-defined amounts are gradually transferred into an equity fund of your choice.

Pension value can decrease: If you choose to withdraw and hold the money in cash, for example in a savings account, the value can decrease in real terms. It can mean your spending power falls, in turn, affecting your retirement lifestyle. As a result, it's important to decide how you'll use the lump sum beforehand.

Is $2000 a month a good pension? ›

Retiring on a fixed income can seem daunting, but with some planning and commitment to a frugal lifestyle, it's possible to retire comfortably on $2,000 a month.

Monthly payments over time are the format that most people associate with pensions. However, a lump sum payment can, sometimes, be the better option. Depending on what your company offers and what kind of returns you can pursue, you might collect more from your money in the long run by taking it all up front.

For longer-term goals, such as retirement or leaving a legacy for the next generation, you may wish to invest some of your lump sum in the stock market. Although the stock market is volatile, history shows that it tends to outperform cash and bonds over long periods.

If you use your tax-free lump sum from a pension to make a new or increased payment to a pension plan, this could be what the government call 'recycling' and be subject to a tax charge. This includes payments made by you, your employer or any third party.

For calendar year plans with a 1-year stability period, 2024 lump sums for this participant are 6%-17% lower than 2023 lump sums. This is on top of an even larger drop in lump sum values between 2022 and 2023.

Investors can avoid taxes on a lump sum pension payout by rolling over the proceeds into an individual retirement account (IRA) or other eligible retirement accounts.

Put it in a savings account - If you want to keep your money safe and let it earn interest, then a savings account is an option. Discover our savings accounts. Put it in a bank account - If you think you'll be spending money, then you could just keep it in your regular bank account.