Should I Take a Lump-Sum Pension Offer or Monthly Annuity?
While the stability of an annuity (monthly payments for life) may sound reassuring, a lump-sum offer is perhaps equally irresistible. How can one decide? Knowing this is a significant decision not to be taken lightly, read this post to learn about various options and make your life a little bit easier in the process.
Pension plans: a brief overview
Per the U.S. Department of Labor, 103,000 private pension plans existed back in the 1970s: a number that dropped to 46,700 (more than 50%) by 2017. The Bureau of Labor Statistics, likewise, recently reported that only 15% of private-sector workers enjoy access to a pension. This downward trend is set to continue. Not only are defined-contribution plans (e.g., 401(k)s) less expensive and less complex to manage than private pension plans, but employers also want to mitigate future pension obligations (thus reducing corresponding financial impacts). To accomplish this, many offer participants a lump-sum payment option in lieu of future monthly payments: a growing retirement-planning trend as more retirees must decide between a one-time payout and ongoing monthly benefits.
Interest rates and lump sum pension offers
Interest rates play a significant role in determining the value of lump sum pension payouts. While these offers are influenced by earnings history and years of service, the current interest rate environment is also a key factor because the lump sum is calculated by estimating the present value of future pension payments; when interest rates rise, the current value of future payments decreases (lowering the lump sum amount you’re offered). Also note most lump sum offers don’t include a cost-of-living adjustment, so while this option might initially seem appealing, it may fail to keep pace with inflation over time (potentially impacting your long-term financial security in retirement).
A lump-sum payout may make sense if…
You can outperform your pension administrator's assumptions
Pension administrators use various factors (e.g., age, life expectancy, and current interest rates) to determine how much you’ll receive if you choose a lump sum. When interest rates are high, the lump-sum offer is usually lower than the value of steady monthly payments because monthly pension amounts don’t change with interest rates (but lump sums do). Since the administrator’s interest rate effectively becomes the “hurdle rate” you need to beat with your own investments for the lump sum to reign supreme, taking this could pay off if you’re confident you can invest it and earn a higher return than the administrator’s assumed rate—especially when rates are low.
For example, the S&P 500’s average of nearly 8% in annual returns from 2000 to 2025 reflects a higher figure than typical pension interest rate assumptions. Your investment performance will ultimately determine whether your lump sum can match or exceed lifetime income from annuity payments.
You don't need the money
If you have ample retirement income from other sources and are confident you won’t need regular monthly payments, choosing a lump-sum payout is perhaps your best option: giving you full control over your funds so you can use or invest the money as you wish. Opting for a lump sum could also enable you to delay claiming Social Security benefits, increasing your monthly payment by ~7% for each year you wait between age 62 (earliest eligibility) and your full retirement age (age 67 for those born after 1960) and by ~8% per year from your FRA to age 70.
You want to protect your legacy
If this is important to you, it’s worth considering how lump-sum payments allow you to leave any remaining assets to children or other heirs upon your death. Monthly pension payments, in contrast, typically stop when you or your spouse passes away (depending on plan options) and thus leave nothing for heirs to inherit.
You're in poor health
As a general rule, people in good health and/or with good reason to believe they or a spouse will surpass the average life expectancy may consider monthly payments the more attractive option. If you're in poor health, don't expect to live very long, and don't need to worry about your spouse's financial situation, however, a lump-sum payment may make the most sense.
You're worried about your employer's financial situation
How private pensions are protected
Most private pensions are protected (even if your employer goes bankrupt) thanks to the Pension Benefit Guaranty Corporation (PBGC), a federal agency that insures private-sector pension plans and typically steps in to pay your benefits (subject to age-based limits). In 2026, for example, the maximum guarantee for a 65 year old (straight-life annuity) is $7,789 per month. It’s important to note the PBGC generally doesn’t cover some plans—such as those offered by small professional practices (e.g., doctors or lawyers with fewer than 25 employees)—making it important to confirm whether your particular plan is protected by the agency.
How public pensions are protected
Those entitled to a public pension can feel confident in retirement security as every state provides some form of legal protection for these benefits, not leaving hard-earned pensions to chance. Plus (and unlike private employers), governments have a unique safety net and can raise taxes or tweak budgets to ensure pension obligations are met even despite funding shortfalls.
How pensions with religious institutions are protected
Pensions managed by a religious institution may face additional risks. Unlike most traditional pensions, these are generally not protected by the Pension Benefit Guaranty Corporation (PBGC)—meaning if the institution faces financial trouble or insolvency, federal insurance might not guarantee such benefits.
Monthly pension payments may make sense if…
You're worried about outliving your retirement savings
Retirement is expensive! The most recent Bureau of Labor Statistics (BLS) data claims retiree households (led by someone age 65+) spend almost $61,432 a year on average. Accounts such as 401(k)s also fluctuate in value, meaning you can deplete your nest egg more quickly than you had planned during economic downturns: making it more difficult to plan for expenses, especially essential costs such as those for housing and healthcare. A pension, meanwhile, is guaranteed income so you can count on receiving the same amount every month for the rest of your life. Although most pensions don't adjust for inflation, monthly payments can certainly provide additional peace of mind.
You're a spender
If you're not financially disciplined, having easy access to a large sum of money is often almost impossible to ignore. Want to take a much-needed vacation, pay for house repairs, or help your kids purchase their first home? Do it, and you'll likely shortchange your retirement. Don't just take our word for it! A recent MetLife study reported 1 in 5 people who took a lump-sum offer drained their account within five and a half years, with an additional 35% concerned funds would dry up at some point.
You're married
Most traditional pensions offer joint and survivor options, allowing for two beneficiaries—often you and your spouse—in exchange for a reduced monthly benefit. In other words, your spouse will continue to collect a pension benefit (typically 50% or more of yours) even after you pass away. When you consider that women live an average of 5 years longer than men (per JAMA Internal Medicine data), losing this option can potentially hurt wives more so than husbands.
Lump sum payout vs. monthly payments: tax implications
Before deciding to take a lump sum payout from your pension plan, consider how taxes will affect your retirement income knowing this type of distribution is generally treated as ordinary income in the year you receive it (potentially pushing you into a higher tax bracket with a larger tax bill). You may also incur a 10% early-withdrawal tax penalty if you take the distribution before age 59½. On the flip side, while monthly annuity payments are also taxed as ordinary income, the corresponding impact is spread out over your retirement years (potentially resulting in a lower annual tax liability).
How to avoid taxes on a lump sum pension payout
No one wants to see a large chunk of their hard-earned money swallowed up by taxes, especially when it comes as a lump sum payout. The good news is you can continue growing your nest egg with a smart rollover strategy. For example, if you transfer your lump sum directly into a qualified retirement account (e.g., an IRA or 401(k)) without taking possession of the funds—known as a “direct rollover”—you can defer taxes until you withdraw the money in retirement, an approach that not only helps avoid an immediate tax hit but also allows your savings to continue growing tax-deferred.
Lump sum payouts: Medicare implications
Opting for a lump sum pension payment can temporarily increase Medicare Part B and Part D premiums if the payout causes taxable income to exceed certain thresholds, an increase due to the income-related monthly adjustment amounts (IRMAA) determined by reported income from two years prior (with your 2026 income impacting your IRMAA in 2028 and your 2027 income impacting your IRMAA in 2029). It’s thus important to carefully consider both the timing and size of a lump sum payment given its ability to trigger higher Medicare premiums for a limited period of time.
In sum: choosing between a monthly benefit and lump-sum pension offer
As you can see, selecting either a lump-sum pension offer or monthly payments is a highly personal decision—and not always so clear-cut. No matter which you choose, know it’ll likely impact your retirement to a significant degree. Retirees can benefit from consulting other resources (e.g., official guides and reputable websites) to further inform their decision-making process, which is precisely why these decisions are best addressed by working with a CFP® professional who can help guide you based on your own unique situation.
Still have questions about pension payout options? Schedule a free consultation with one of our CFP® professionals to get them answered!
FAQs
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The PBGC plays a crucial role in safeguarding pension plans should an employer experience financial distress, this federal agency responsible for insuring private-sector pension plans and stepping in to provide coverage/protection for participant pensions if an employer terminates a plan due to financial difficulties. It’s important to note, however, that not all retirement plans are insured by the PBGC (so be sure to verify if the agency protects your specific plan).
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Yes, taking a lump sum pension offer can indeed pose a significant risk as you can very well deplete your funds in this manner. As life expectancies continue to rise, retirees face the very real possibility of outliving their savings—especially if they spend the money too quickly. Several studies likewise indicate that those who decide to cash out their pensions are less likely to maintain the same financial stability they once had within just five years’ time. On the other hand, opting for monthly payments provides a steady stream of income for the duration of one's life; the risk of running out of money is thus significantly higher when an individual decides to cash out early.
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Though each entity has its own unique reasons for offering a lump-sum pension option, the most common is to shed expenses from its books. Pensions aren’t cheap, after all, and include the overall value of this in addition to necessary administrative expenses and insurance premiums for plans.
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To do this, you’ll need to request a direct rollover from your pension plan to your IRA provider whereby the money won’t touch your hands during the transfer, helping to avoid any penalties and allowing your savings to continue growing tax-deferred.
About the author
The content in this post was developed by our team of writers and reviewed by our team of CFP® professionals here at Vision Retirement.
Retirement Planning | Tax Preparation | Investment Management
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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. Schedule a no-obligation consultation with one of our financial advisors today!
Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.
