Pension funds in general require that you invest a portion of your pension payout into an annuity with a lump sum available of no more than 30% of the value of the pension fund payout.
This has attracted a lot of attention in the retirement industry of late with returns in money market funds and the like producing better returns for investors than is Annuities. The ability to take the lump sum of the pension fund payout and invest it as you choose is a far better arrangement in the current economy, however what worries the government is that the investment of these lump sum annuities come with certain risks attached, not least of which is that the lump sum pension fund payout is in fact invested in a vehicle that will provide an income during retirement.
The reason the retirement industry forces a portion of the pension fund to paid out as a lump sum and a greater portion to be used only for the purchase of an annuity is to ensure retirement income and this must be kept in mind. Investors are not all equal and retirement benefits in the form of a lump sum payout could be lost in no time at all and make the play ground for unscrupulous investment advisors that much larger.
The downside of lump sum pension payouts
The possibility that the lump sum will not be invested for retirement income and spent.
Lump sum investments may be invested in very risky funds with the promise of unrealistic returns by unethical investment advisors.
Investing your lump sum in an annuity based product is essential for your future retirement, be it a high interest bearing notice deposit account, a managed money market account or any other variable interest product bearing in mind that you need flexibility to change or move the lump sum investment to a different investment should it perform poorly.
Many individuals choose to sell their annuities to investment companies on a structured settlement basis where the annuity is paid out in a variation of ways, either in equal monthly amounts, different amounts at certain times or a lump sum payout.
Always consult your financial advisor on the tax implications when opting for a structured settlement annuity, this could have a dramatic effect on your future income and retirement benefits.
