What Is an Annuity Buyout?

An annuity buyout is a financial transaction where an individual or company sells their annuity, a contract for regular payments from an insurance company, to another party for a lump sum payment. This can seem appealing when a lump sum is more useful than the periodic payments provided by the annuity. LIMRA’s U.S. Individual Annuity Sales Survey, covering 92% of the national market, projects that annuity sales will exceed $400 billion in 2025¹. A financial advisor can help you weigh the pros and cons of a buyout and determine whether it fits your overall financial goals.

How a Bulk Purchase of Annuities Works

In a bulk purchase of annuities, a company plays the role of the good Samaritan, purchasing the annuities of a group of people, typically retirees from the same company. This isn’t a spur-of-the-moment decision but begins when the annuity holder agrees to sell his or her annuity. The purchasing company then exchanges vows and payments with the insurance company that issued the annuity, effectively becoming the new owner of the annuity. 

Now, picture this process with three key players: The annuity holder, the insurance company and our good Samaritan, the purchasing company. Each has a role to play and each could be impacted a bit differently. Let’s look at how annuity buyouts and pension plans intermingle.

Legal Protections and Guarantees in Annuity Buyouts

When an annuity buyout happens, your payments shift from the employer’s pension plan to a private insurance company. That means federal pension protections from the Pension Benefit Guaranty Corporation (PBGC) no longer apply. Instead, coverage depends on your state’s life and health insurance guaranty association.

These state guaranty associations provide a safety net if an insurance company fails. The limits vary by state, but most fall between $250,000 and $500,000 per person, per company for annuity benefits. If your annuity balance is larger than your state’s coverage cap, you could lose a portion of your income if the insurer cannot meet its obligations.

Employers usually choose large, well-rated insurers for pension buyouts to minimize this risk. Still, it’s important to know what your state covers. If you’re offered a buyout, you should confirm which state’s rules apply and how much protection you’d have in the worst-case scenario.

Note: These limits apply per person, per insurance company. If you hold multiple annuities with the same insurer, the coverage cap is combined. If you hold annuities with different insurers, each policy may be protected up to the limit in your state.

Annuity Buyouts and Pension Plans

Annuity buyouts are mostly connected to pension plans and the pension funds’ inability to carry the annuity contracts of its members. This often happens when a pension is closing or a union contract changes hands to new representation. 

Consider a company wanting to wash its hands of pension liabilities. This is where an annuity buyout typically comes into play. The company can offload these responsibilities to an insurance company, transferring the duty of fulfilling pension benefits. However, if the insurance company fails to honor the annuity, the repercussions can be significant for pension holders. It’s important to weigh the pros and cons of a buyout before completing one in order to limit potential exposure. 

It should be noted, however, that this isn’t something retail investors or consumers typically have to worry about unless they are offered a buyout. In that case, speaking to a financial advisor is advised to best help you through the situation.

Benefits of an Annuity Buyout

The attractiveness of an annuity buyout is that it offers a company respite from the risk and burden associated with managing a pension plan. For individual annuity holders, a buyout presents an enticing lump sum addressing immediate financial needs, but can often cost those individuals money over the long haul.

Several high-profile annuity buyouts have proven successful. As an example, Prudential bought out the pension plans of 100,000 IBM employees for $16 billion in 2022², and then acquired $5.9 billion from Verizon in 2024³. The success in these instances is attributed to strategic planning and effective execution, but each was met with mixed emotions for the individual.

How You Are Impacted During a Pension Buyout

A financial windfall from a pension buyout could either translate to a sum for investment or meet immediate needs. However, the flip side is the potential loss of regular income from the pension. If your pension is bought out and you’re offered a potential buyout, it can be tempting to take the lump sum. However, it’s important that you understand that you’re likely being offered less than what you might be owed. 

Any buyout comes with risks but one of the best benefits of this for you is that you’re able to take the money, reinvest it, and make it work for you. While you might not be able to count on the money for retirement income any longer, you still should be able to make a positive investment with the lump sum being offered. 

Another perk of these buyouts is that individuals are often offered multiple options. It’s likely that you’ll be offered one of these two things: 

1. To stay in the pension under new management
2. To receive a lump sum payment

Whatever you decide, it’s important to have a plan going forward to make sure your retirement isn’t negatively impacted.

Tips for Dealing With an Annuity Buyout

There are things you can do to best prepare yourself to make the right financial decision. When a buyout happens you might not be fully prepared for it but it can be a positive thing if you’re able to weigh the benefits and establish a good retirement income. Here are some tips that can help you make your decision easier:

• Talk to a financial advisor: If an annuity buyout knocks on your door, seeking advice from a financial advisor helps to decipher its implications and navigate towards an informed decision. The expertise of a financial advisor can answer your queries, forecast potential outcomes, and provide guidance. 
• Do your own research: Several online resources and tools can assist during this process.
• Make a plan: If you’re taking the lump sum then it’s important to make a financial plan so that you don’t end up spending too much of your retirement. 
• Calculate your net impact: Calculate how much money you might be missing out on with either option so that you can choose the best one for you.

Bottom Line

For those evaluating a buyout, either personally or on behalf of a client, it is important to review contract terms, surrender charges, tax implications and the financial strength of the purchasing party before proceeding. Selling an annuity can provide immediate access to cash, which may be useful for covering expenses, paying down debt or reinvesting in other opportunities. However, giving up guaranteed income also means losing future security and possibly accepting a lower overall value compared to the original contract.

Tips for Retirement

• A financial advisor can guide you through an annuity buyout by assessing its impact on your retirement and helping you evaluate your options. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now. 
• Using SmartAsset’s free retirement calculator can help you see if you have enough saved for retirement to take a lump sum payment. 

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