Close this search box.

Monthly Annuity or Lump Sum?

lump sum of money

The Beatles or Stones? New York or Chicago-style pizza? Monthly annuity or a lump sum?

These are some of the most important questions you will have to answer in your life. But, the correct answer will vary depending on factors like:

  • Your retirement income and expenses
  • Life expectancy
  • Wealth transfer plans

Due to volatility and mounting pensions costs, companies are increasingly buckling down. As such, they’re offering current and former employers either a lump-sum payment now or hold on to their pension plan.

“Companies are offering these buyouts as a way to shrink the size of future pension obligations, which ultimately reduces the impact of that pension plans have on the company’s financials,” says John Beck, senior vice president for benefits consulting at Fidelity Investments. “From an employee’s perspective, the decision comes down to a trade-off between an income stream and a pile of money that’s made available to him or her today.”

Taking the Lump-Sum Payment.

The process is fairly straightforward. You’ll receive a one-time check or IRA rollover. Usually, this is the actuarial net present value of your age-65 benefit, discounted to today.

The main benefit of a lump-sum payment is the flexibility that it provides. Instead of putting all of your trust in a pension fund manager, you decide where to put your money. For example, you could use it to pay off your mortgage, earn a passive income, or leave it to your heirs.

There are some downsides to consider. These include:

  • Making sure that you have enough money to last through retirement.
  • Being aware that your investments are based on market fluctuation.
  • Lump-sum payments have an inverse relationship to interest rates — this means that if an interest rate rises, the lump sum value will decline.
  • You’ll be taxed as ordinary income if you do not roll the proceeds directly into an IRA or an employer-qualified plan like a 401(k) or a 403(b).
  • If you use this money to purchase an annuity, you may receive as good of a deal from the insurance provider.

Keeping the Monthly Payment.

Just like an annuity, keeping the monthly payment ensures that you have a guaranteed income for the rest of your life. Having an exact amount for a monthly payment will make it much easier to plan your retirement budget since you already know how much you’ll be earning each month.

There are some drawbacks to consider, though, primarily:

  • Benefit amounts rarely increase between now and when you retire. Moreover, they’re not subject to inflation protection, meaning your monthly benefits will decrease in purchasing power.
  • You’re also betting that your employer will have the means to pay your monthly benefits. If they are no longer due, you’ll receive a portion from the Pension Benefit Guaranty Corporation (PBGC), which could be much lower.

There’s no right or wrong answer. Each has its own unique pros and cons. It ultimately depends on your specific pension and comfort level. If you believe that the pension will run out of funds, take the lump-sum and roll it over to something like an IRA.

Chapters - Pension

About Due

Due makes it easier to retire on your terms. We give you a realistic view on exactly where you’re at financially so when you retire you know how much money you’ll get each month. Get started today.

Due Fact-Checking Standards and Processes

To ensure we’re putting out the highest content standards, we sought out the help of certified financial experts and accredited individuals to verify our advice. We also rely on them for the most up to date information and data to make sure our in-depth research has the facts right, for today… Not yesterday. Our financial expert review board allows our readers to not only trust the information they are reading but to act on it as well. Most of our authors are CFP (Certified Financial Planners) or CRPC (Chartered Retirement Planning Counselor) certified and all have college degrees. Learn more about annuities, retirement advice and take the correct steps towards financial freedom and knowing exactly where you stand today. Learn everything about our top-notch financial expert reviews below… Learn More