One of the most important financial responsibilities that all people share is properly preparing for retirement. While there are plenty of tax-advantaged retirement accounts and other options available, one of the ways that someone can save enough money for retirement is to take advantage of a corporate, state, federal or military pension plan. A pension is a retirement plan that will provide someone with a defined amount of benefits in the future. People typically will accumulate pension benefits each year that they work and could eventually earn a significant defined fixed annual benefit through their pension plan.
While a pension plan is intended to give a fixed amount of money after someone retires each year, it may be a better idea to receive a discounted lumpsum cash payout now, rather than waiting years for all of your payments to be received. A pension is essentially an annuity, which means that the fixed amount of benefits that are received on an annual basis can be valued using certain discount factors.
With a pension purchase, you will receive a discounted lump sum cash payout for your future pension payments, as opposed to receiving your benefits in regular installments over time. You can either opt to receive everything upfront and no future benefits, or receive a smaller amount upfront and still receive some future benefits. There are many reasons why someone may choose to take advantage of a pension purchase.
One reason why someone would want to take advantage of a pension purchase is they want to pay off debts prior to their retirement. When many people go into retirement they have the itch to be completely debt-free. Many people will sell either a part or all of their future pension payments and use the proceeds to pay off their mortgage, auto loans, credit cards, or other personal debts. This will then clear up a lot of monthly cash flow as their monthly personal obligations are drastically reduced. They will also save a lot of money over time by no longer having to make those interest payments. However, this needs to be balanced against the fact you will receive less money in the future because of the sale of your future pension income at a discount. You should consult a financial professional before making any decision as to whether to sell your future pension income.