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The Lump Sum vs. Annuity Pension Debate

November 19th, 2020 | 4 min. read

By Jacob Schroeder

pension lump sum or annuity

A pension is a valuable workplace benefit that puts most of the responsibility on your employer. In exchange for your service, your company provides a significant amount of money for your retirement. You don’t have to choose or manage a set of investments. However, you do have to eventually make a big decision: Should you take a lump sum or annuity pension payout?

The right payout option depends on how much you need, how much risk you want to take and how much you expect from other retirement income sources.

Each option has pros and cons. With a lump sum, you gain greater flexibility over the money, but that comes with greater risk. Taking the monthly pension means you would receive guaranteed income for life, though its value may decline over time due to inflation.

But also consider more than just the basic pros and cons. Things like your financial goals, your other assets and your desired retirement lifestyle will all play a role in your decision. So, think about all the following variables before you decide.

Lump sum pension pros and cons


Greater control – You will have complete control over your money. You can invest it as you want and reap the full rewards of any growth. It could mean more money for yourself and your beneficiaries.

Beneficiary/inheritance options – With a lump sum, you can pass on the remaining balance however you see fit – to your spouse, children or a charity.

Inflation protection – A lump-sum payout invested in an IRA gives you the ability to choose investments that may help your money grow above the rate of inflation.


Market risk – Investing in the market always carries the risk of losing money during a market downturn.

Greater responsibility – You will be in charge of your money, which 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 set an appropriate spending rate to avoid outliving your money.

Annuity pension pros and cons


Income for life – You can expect a pension paycheck every month. So, you can worry less about outliving your money.

No market risk – Since you won’t be investing your pension payout, you don’t risk a loss of principal in the market.

Less responsibility – You don’t have to rely on your own investment expertise in hopes of generating a rate of return and appropriate withdrawal rate to create a reliable income throughout retirement.


No inflation protection – Your pension may not be indexed to inflation, meaning you won’t receive a cost-of-living adjustment and may experience a loss of buying power over the course of your retirement.

Lack of beneficiary/inheritance options – If you pass away only your spouse may be able to receive a portion of your pension payments.

Additional pension payout considerations

The pros and cons may lead you in the right direction. But it is important to look at how your pension fits within your whole financial picture.

  1. What you can do with your pension

It is typical for a pension plan to actually offer several payout options. In addition to a full lump sum or monthly annuity, you may be able to choose a mixture of the two or a shared amount for your surviving spouse. So, if you’re married, you have to also think about what you want the money to do should you pass away.

Additionally, a lump sum pension payout does not mean you simply receive a big check in the mail. Taking a full lump sum in cash would trigger a huge tax hit. Instead, you can roll it over into an IRA, which lets you invest the money where it can grow and supplement your other income.

  1. Your Social Security benefit

Along with your pension, your Social Security benefit is another source of guaranteed retirement income. You can file for Social Security as early as age 62, but for a permanently reduced benefit. To receive the full amount of your benefit, you must claim Social Security at your full retirement age, which is 66 or 67 depending on the date of your birth. However, each year you wait until age 70 entitles you to a higher benefit of up to 8% per year.

Depending on the age you retire, you may want to rely on a monthly pension as you wait to maximize your Social Security benefit.

Or, if you choose to take and invest your lump sum, it may make sense for you to file for Social Security early or at your full retirement age so you can grow that money and avoid significantly drawing down your account.

  1. Your investment assets

It’s likely you also have money saved in a 401(k) and/or other investment accounts. Investments, of course, are vulnerable to market volatility. A monthly pension could essentially offset that risk. After all, retirement is generally the time to be more conservative as you ride out market fluctuations and prepare for annual required minimum distributions when you turn age 72.

By the same token, you could benefit from adding to your invested assets with the lump sum, which gives you a greater leg up on inflation and potentially leaves more money to be distributed for your estate goals. In the end, it is a matter of your risk tolerance and financial goals.

  1. Retirement expenses

A pattern you may have noticed is that a lot depends on how much you need from each retirement respective asset (pension, investments, Social Security, etc.). And that all depends on how much you spend in retirement.

If your expenses are reasonable enough, then you have more flexibility and room to take on more risk.

On the other hand, if you have high non-discretionary expenses, perhaps as a result of medical care needs, then having as much guaranteed monthly income as possible makes sense.

Ultimately, the right choice between a lump sum and annuity pension goes beyond just the differences between the two. It takes careful consideration of the things discussed above, which is better to do with the guidance of a financial adviser. A financial adviser can help you create a comprehensive retirement plan and avoid costly mistakes. Just make sure you work with a fiduciary, who is legally obligated to suggest the option that is in your best interest.