Key differences

Now let’s break down what sets these financial arrangements apart…

Origin and purpose

• Pension plans: Arise from an employment relationship and represent deferred compensation earned during working years. Their purpose is to provide retirement income.
• Structured settlements: Result from legal settlements, typically for personal injury, wrongful death, or similar claims. Their purpose is to compensate victims for injuries or losses suffered.

Funding sources

• Pension plans: Funded by employer contributions (and sometimes employee contributions) throughout the employment period.
• Structured settlements: Funded by defendants or their insurance companies through a one-time purchase of an annuity.

Tax treatment

• Pension plans: Generally taxable as ordinary income when payments are received (except for any after-tax contributions).
• Structured settlements: Payments from qualified personal injury structured settlements are completely tax-free.

Control and flexibility

• Pension plans: Generally offer limited flexibility, with payment amounts and schedules determined by the plan’s rules.
• Structured settlements: Can be customized at creation to meet the specific needs of the recipient, though they typically cannot be changed after implementation.

Transferability

• Pension Plans: Generally cannot be sold or transferred to third parties.
• Structured settlements: While designed to be non-transferable, some states allow the sale of future payment rights to factoring companies (often at a significant discount) under court approval.

Inheritance

• Pension plans: May offer survivor benefits to a spouse or other beneficiary, but these are typically limited and may reduce the primary benefit amount.
• Structured settlements: Can include provisions for payments to continue to beneficiaries after the recipient’s death.

Common misconceptions

Here are a few things that people get wrong about pensions and structured settlements:

Misconception 1: “Pension plans and structured settlements are interchangeable terms.”

This is incorrect. While both provide periodic payments, they arise from fundamentally different circumstances—employment versus legal settlements—and serve different purposes.

Misconception 2: “Both pension plans and structured settlements are tax-free.”

Only qualified structured settlements for personal physical injuries are completely tax-free. Pension payments are generally taxable as ordinary income when received.

Misconception 3: “Both can be easily sold or transferred.”

Neither is designed for easy transfer. Pension benefits generally cannot be sold, while structured settlement transfers are heavily regulated and require court approval in most jurisdictions.

Considerations for recipients

A few things to keep in mind if you have either of these financial instruments:

For pension plan recipients

• Understanding your benefits: Review your pension plan documents to understand payment options, survivor benefits, and any cost-of-living adjustments.
• Tax planning: Work with a financial advisor to plan for the tax implications of your pension income.
• Claiming strategies: Consider the optimal age to begin receiving benefits, especially if you have options regarding timing.

For structured settlement recipients

• Customization: When establishing a structured settlement, work with an experienced settlement planner to create a payment schedule that meets your long-term needs.
• Resist quick cash offers: Be cautious of companies offering to buy your structured settlement for immediate cash, as these deals often provide pennies on the dollar.
• Tax advantages: Understand that the tax-free nature of qualified structured settlements provides a significant advantage over lump-sum settlements that might generate taxable investment income.

The takeaway

While pension plans and structured settlements share the characteristic of providing periodic payments over time, they are distinct financial arrangements with different origins, purposes, tax treatments, and regulatory frameworks. Pension plans are employment-based retirement benefits, while structured settlements are compensation for legal claims, typically involving personal injury.

Understanding these differences is crucial for individuals who may be recipients of either type of financial arrangement. Each has its own set of rules, benefits, and limitations that should be carefully considered within the context of one’s overall financial planning.

For specific advice regarding pension plans or structured settlements, it’s advisable to consult with qualified financial advisors, tax professionals, or attorneys who specialize in these areas.

Let Peachtree help

At Peachtree Financial Solutions, we’ve helped thousands of people get their money sooner by purchasing their future annuity payments for a lump sum of cash. Selling your payments is a regulated process and we have a lot of experience with these transactions. And while every annuity is unique, which means every payment sale will be different, they all have the same basic five steps:

1. Call one of our representatives.
2. Receive a free, no-obligation quote for the sale of your payments.
3. Review and sign the purchase agreement.
4. We process the agreement with your insurance company.
5. You get your cash

Why should you choose Peachtree?

It’s all part of something we call the Peachtree Promise: our experienced, dedicated representatives listen to your goals and clearly explain your available options. We meet you where you are without judgement and work hard to help you meet your financial goals. Getting your quote is completely free, and you’re under no obligation to sell to us if you aren’t completely satisfied with what you hear.