Should You Take the Lump Sum or the Annuity Payments from Your Pension?

This highly important question tends to receive significantly less attention in today’s economy than it should. Many people see a lump sum as a way to either pay down debts or seed stock gains. This attitude is further fueled by financial advisors who need to bring in assets, like your pension lump sum and 401k, to generate revenue. (You are most likely paying fees through asset-based management or advisory fees or as the sales charges on your purchases.) As an employment attorney who once worked employer-side with pension plans, I have discussed this question with a large number of retirees.

What is a Pension Plan?

Before we delve into the specifics of lump sum and annuity payments, it’s essential to understand what a pension plan is. A pension plan is a retirement plan that an employer sets up for its employees. It is designed to provide employees with a fixed income during retirement, typically based on their salary and years of service with the company.

Lump Sum Payouts

A lump sum payout is a one-time payment that you receive from your pension plan. This payout can represent the total value of your pension, or you may be given the option to take a portion of it in a lump sum while the rest is paid out in annuity payments.

Pros of Lump Sum Payouts

  • Flexibility: With a lump sum payout, you have the flexibility to use the money as you see fit. You can invest it, pay off debts, or use it to purchase a new home or travel.
  • Control: You have complete control over your retirement funds and how they are invested. You can choose to invest in low-risk options or take a more aggressive approach with high-risk investments.
  • Inheritance: With a lump sum payout, you can leave any unused funds to your heirs or designated beneficiaries.

Cons of Lump Sum Payouts

  • Risk: There is a risk that you may outlive your retirement savings if you are not careful with your investments or if you spend the money too quickly.
  • Taxes: A lump sum payout may result in a significant tax liability, depending on the size of the payout and your tax bracket.
  • Management: You are responsible for managing your retirement funds and ensuring that they last throughout your retirement.

Annuity Payments

Annuity payments are regular payments that you receive from your pension plan over a specific period, typically for the rest of your life.

Pros of Annuity Payments

  • Guaranteed Income: With annuity payments, you have a guaranteed source of income for the rest of your life, regardless of how long you live or what happens in the financial markets.
  • No Investment Risk: You do not have to worry about investment risk or managing your retirement funds, as the pension plan does that for you.
  • Tax Benefits: Annuity payments may have tax advantages, depending on the type of annuity and your tax bracket.

Cons of Annuity Payments

  • Lack of Flexibility: Once you start receiving annuity payments, you cannot change the amount or frequency of the payments.
  • No Control: You have no control over how your retirement funds are invested, and you may not agree with the investment choices made by the pension plan.
  • No Inheritance: Unless you have selected a joint and survivor annuity, any unused funds will not be passed on to your heirs.

Pension payment elections are individual questions

Bedford Divorce Lawyer for Divorce in Tarrant County and Dallas CountyThere is no one-size-fits-all answer to this question. It is a highly individualized question based upon your age, assets, income needs, estate planning, marital status and other issues. Questions loom beyond how to collect your pension. How are you going to finance your retirement? What assets do you intend to leave behind? Who do you intend to leave as beneficiaries to your estate? Do you have enough assets to cover you in retirement?

It is difficult to responsibly look at any one question without considering the others. Many of those issues have both financial and legal implications. In addition to the legal implications of those questions, there may be legal problems with the way your former employer or soon to be former employer is calculating your benefit or what payment options they are presenting. Pension plans fall under ERISA, a complex federal regulatory scheme that controls most pensions. Unfortunately, many financial advisors are unfamiliar with ERISA. Although they may be able to assist you with collecting payment, they may not be equipped with the expertise to defend your rights to your full benefits.

Pension payout decisions when you retire

Decisions about how to disburse a pension plan are highly individualistic decisions with your retirement plan, savings and pension plan rules. Most modern pension plans today have lump sum disbursement options; however, older pension plans often have limited or no lump sum option. In soaring stock market years many people tend to take lump sum payments thinking that they can increase the value of the pension benefit through investment until they retire. While this may be true for some retirees, in down market years the benefit may lose value. The other consideration often overlooked is with annuity payments the retiree can never run out of payments because the employer has guaranteed a lifetime stream of income. These decisions need to be carefully considered within the framework of the retiree’s options and economic situation. To understand more about your pension plan rules you should talk to an employment attorney. Employment attorneys experienced with pension and other retirement plan rules can help you navigate the complex regulations governing these plans.

Factors to Consider

When deciding between a lump sum payout and annuity payments, you should consider the following factors:

  • Your current financial situation and retirement goals
  • Your life expectancy
  • Your risk tolerance
  • The stability and financial health of your pension plan
  • Tax implications


Choosing between a lump sum payout or annuity payments from your pension plan is a personal decision that depends on your unique financial situation and retirement goals. Both options have their pros and cons, and you should carefully consider your options and consult with a financial advisor before making a decision.


1. Can I choose a combination of lump sum and annuity payments?

Yes, some pension plans may offer a hybrid option where you can receive a portion of your pension as a lump sum and the remainder as annuity payments.

2. How do I know if my pension plan is financially stable?

You can check the financial health of your pension plan by reviewing the plan’s annual report or consulting with a financial advisor.

3. What happens if my pension plan goes bankrupt?

If your pension plan goes bankrupt, the Pension Benefit Guaranty Corporation (PBGC) may step in to protect your benefits. However, the amount of protection provided by the PBGC is limited.

4. Can I change my decision after I have chosen between lump sum or annuity payments?

In most cases, once you have chosen between lump sum or annuity payments, you cannot change your decision. However, some plans may offer a limited window of opportunity to change your election.

5. Should I consider other sources of retirement income before deciding between lump sum or annuity payments?

Yes, it’s important to consider all sources of retirement income, including Social Security, other pensions, and personal savings, before making a decision between lump sum or annuity payments. This can help you determine how much income you will need during retirement and how best to structure your retirement portfolio.

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