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Personal Finance

Lump Sum or Monthly Pension? Pros and Cons

August 31st, 2015 | 2 min. read

By Jacob Schroeder

Lump_sum_or_monthly_pensionIf you are expecting or are already receiving a monthly pension payment, there’s a chance that you’ll be asked to accept a single lump sum instead. More and more companies are trying to reduce the risk of pension liabilities by offering both current and past employees the option between a lump sum and a monthly payment.

Some may see it as simple as choosing between taking one big paycheck upfront or smaller paychecks that are guaranteed each month. But it’s more complicated than that. You must decide which option will best support you and your family for the rest of your life. Unfortunately, you’ll likely only have few months – or even weeks – in which to make a decision.

Here are the options and the general pros and cons of each.

Early Lump Sum


  • Control. You will have complete control over your money. If you invest it in a retirement account, you can choose from a universe of investments, be as aggressive or conservative as you want, and reap the full rewards of any growth. It could mean more money for yourself and your beneficiaries.

  • Inheritance. With a lump sum, you can pass on the remaining balance however you see fit – to your spouse, children or a charity.

  • Taxes. If you roll over your lump sum into an IRA, you owe taxes only on the amount you withdraw each month.lit When reach the age of 70 ½, you will have to withdraw a certain amount to fulfill your required minimum distribution. Still, the tax liabiy may be lower than the federal income tax rate you have to pay on your monthly pension payments.


  • Less money. Depending on how your company calculates a lump sum, it may not equal the monthly pension payments over your life expectancy. Therefore, you could receive less money than you would by sticking with your pension. Also, your lump sum amount may not be enough to replicate your pension without taking higher risk in the market.

  • More responsibility. You will be in charge of managing your money. This can be a bad thing if you lack the confidence to manage it well enough to sustain you over the course of your life. In addition to making prudent investment decisions, you have to avoid any temptation to take such a large pool of money and unwisely spend it.

  • Longevity. If you have a long life expectancy, then you have a greater chance that you may outlive your money.

Monthly Pension


  • Guarantee. You can expect a certain amount every month. You don’t have to risk a permanent loss of principal in the market, or worry that you’ll outlive your money.

  • Less responsibility. Since your pension is managed by your company, you don’t have to rely on your own investment expertise in hopes of generating a rate of return to create a reliable income source.


  • Inflation. Your pension may not be indexed to inflation, meaning you won’t receive a cost-of-living adjustment and may experience a substantial loss of buying power over time.

  • Inheritance. If you pass away, your spouse may only receive a portion of your pension payments. Meanwhile, your children will receive none of it.

The pros and cons between taking a lump sum or monthly pension should be heavily considered as they apply to your personal situation. If you’re in this situation, work with a financial adviser to check the numbers and help determine what option is best for you.

If you don’t have a financial adviser, you can contact one of our advisers here.