Are there advantages in rolling over your lump sum payment from a pension plan to an IRA account?

I know the advantages of 401K rolling over to an IRA account (i.e. more fund selection, etc.) The pension plan was credited an average of 4% a year for 5 years. The timeframe is 10 to 12 years going forward. If I assume a 10-year average of positive 9% annual return on mutual fund investment, should I rollover the lump sum payment from company pension plan to an IRA account? Is there any hidden advantages in keeping the pension plan? Are there disadvantages in rolling over pension plan lump-sum payment to an IRA aacount?

Let's get the terminology and my assumptions out in the open and then you be the judge:

1. By "lump sum payment from a pension plan" I am assuming you are refering to a lump sum distribution from a defined benefit pension plan. These plans are designed to pay an annual income to you for life. The lump sum distribution is the estimated value of that life income payable in one neat check.

2. You are a typical investor with some experience directing your own investments. This means that you are not going to take it and dump it into a Bank savings account and earn 2% interest.

Your first question in this situation should be: Should I take a lump sum or should I leave my benefit with the plan?

Option 1: Leave it. If you leave the benefit where it is, you will be entitled to start collecting the retirement benefit as a annuity when you retire, generally age 65, sometimes earlier. You will have the option to take that benefit as an annuity, a monthly income for the rest of your life, GUARANTEED. The pros are you can forget about this benefit until you're retiring. Someone else will deal with it and the benefit is guaranteed by the plan and the Pension Benefit Guarantee Corporation (The FDIC of pensions). The cons are you don't get to invest that money yourself and beat the market.

Option 2: Take a lump sum. The lump sum will be calculated using mandated assumptions which assume a fairly low rate of interest (currently around 5%) and completely average longevity (if your in poor health, your getting a windfall; if your in good health, you're getting rooked) Because the interest rate used is so low, it is fairly easy for you to invest this cash yourself and do better than 5%. Realize though that you are throwing away that guaranteed lifetime income. You CAN buy an annuity from the local life insurance company but these are generally sold at less favorable rates then you got when you converted your pension AND you are risking that interest rates don't turn against you right before retirement. Also, no one is guaranteeing your benefit. Invest poorly and you are out of luck.

Neither of these options is a slam dunk no matter what anyone tells you. My main point is this: do not ignore the value of having a guaranteed income in a world where people are living longer and longer.

Important side point: If you do opt for the lump sum, definitely roll it directly into an IRA. If you don't you will owe income tax on the distribution and an extra 10% excise tax for good measure. keep the tax man's hands off your cash as long as you can.

Companies have somehow been able to play games with pension plans, but not knowing about what is true in YOUR case, hard to say. You can go the traditional IRA route and deduct not more than $5K (maybe a bit less) in a given year and defer the tax hit or pay the taxes and have the future income from your money tax free in a Roth.

Whether there is an "advantage" depends on what YOU do!

If you leave it in the pension, someone else decides how to invest it; if you roll it over, YOU decide how to invest it.

If you are an idiot, the pension plan may do better. But if you have an ounce of common sense, you are bound to do better because you are just trying to make money for YOU, not for you plus a fee for the plan!

Whenever I leave my job, one of the first things I plan to do is roll my pension plan money over into an IRA. They're investing it way too conservatively for me (or paying too much for advisors) because the return during the period 2003-2006 has been between 3.5% and 6% per year, while the S&P 500 index averaged about 12.7% compounded for 2003-2006. Over long periods of time, the stock market has historically averaged much more than 6% per year, so I can't wait to get control of that money so I can invest it somewhere that it will grow faster.

If you have a choice, the only reason I can think of to keep it in the pension plan is if I was a gambler type and likely to throw the money into hot story stocks, penny stocks, etc. and end up losing a lot of it. Fortunately, I'm not, so by investing through the IRA in a well-diversified set of stocks or mutual funds, I think it's almost certain I'd do better than what the pension is doing.

I always feel there is more positives to rolling over the pension to an IRA for a few reasons.
1. You are in control of your money, not them
2. Your beneficiaries receive the full money, vs if you die your spouse only would receive a reduced amount (usually 50%) and any other beneficiary would receive nothing.
3. The company could always go bankrupt and even though pensions are usually backed by insurance, as we have seen with USAIR and alot of other steel industries, people have received nothing or again a reduced amount. If you take the money now, it is yours....

Those are the main advantages I see to rolling your pension into an IRA. For me, my most important thing is giving the money to my beneficiary in full and not having a reduced amount for my spouse if something happens to me. You could even find products out their that are Pensions(with the guarantees like your pension, made for the individual investor inside your IRA. GE has a great individual pension plan)