Employees who prefer to receive pension benefits in a lump-sum payment can do so if they meet certain employee and employer qualifications. A pension plan member may opt to take a lump-sum distribution to achieve lifetime financial goals, such as traveling. Although there are tax consequences, there are also ways to ease the burden.
Choosing a lump-sum payment from a pension will leave an employee or beneficiary with a large amount of cash. Taking this large distribution is the alternative to receiving annuity-style payments for the remainder of the retiree's life. Instead, the retiree receives the balance of the benefits in a short amount of time. Pension benefits are calculated based on the years served at the company in addition to the employee's salary and contributions made to the plan.
To qualify for a lump-sum pension payout in the U.S., you must meet specific criteria. An employee must have at least five years of employment with the business sponsoring the pension. You can receive the lump-sum payout all at once or over the course of a single tax year. Also, the employee must be 59 and one-half to receive the payment. If you don't meet the age requirement, you face additional penalties for early withdrawal.
If you cash out early and fail to meet the outlined criteria, you will incur a 10 percent premature withdrawal tax, according to Smart Money. Some exceptions exist, however, such as a court-ordered divorce settlement or medical bills that exceed 7.5 percent of your annual gross income. Although you still need to pay the income tax on the money received, the 10 percent penalty is not applicable. An option to postpone paying tax on pension benefits is to immediately roll or transfer the lump sum amount into another retirement account known as an Individual Retirement Account, or IRA. The retiree can then make withdrawals and must abide by tax laws of that retirement account.
According to The Wall Street Journal, as a result of U.S. legislation passed in 2006, a pension does not have to pay employees a lump-sum payment if liabilities or amounts owed exceeds the total value of the pension fund. If a pension plan is not thoroughly funded and there is an unhealthy ratio between assets and liabilities, employees may only be able to receive a portion of pension benefits as a lump-sum payment and the remainder must be paid as an annuity in distributions over time.
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