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Lump Sum or Annuity: Which Pension Payout Is Right for You?

Filed under: Estate Planning, Retirement

Are you one of the fortunate few who will retire with a defined benefit plan, more commonly known as a pension? They’ve been quickly disappearing from corporate benefit offerings over the past several decades as 401(k) plans have grown in popularity. However, there are still some active pension plans in place.

If you have a pension, you may face an important decision when you retire. Do you take the benefits in a lump sum or in a stream of regular, annuitized payments? The annuity payments offer predictability and guaranteed income. However, the lump sum may offer flexibility and control. It’s not an easy decision.

Below are a few items to consider with each option. Before making your decision, carefully review your other sources of retirement income, your planned expenses and your needs. Your choice should be based on your unique goals and concerns.


Benefits of a Lump Sum

In a lump-sum pension payout, you are paid your entire benefit at one time. The lump-sum amount is determined through a complex calculation that discounts the stream of expected annuity payments.

There are several reasons a lump-sum option is appealing. One is that it gives you control over your retirement funds. You can use the lump sum to pay down debt, or you can invest the funds to generate income in the future.

A lump sum could also help you leave a greater legacy for your loved ones. One of the challenges with an annuity pension option is that you could pass away before you receive a significant amount of the payments. If so, your family may not receive any survivor benefits. With a lump sum, you can include your payout in your legacy plans.


Benefits of an Annuity

While a lump-sum payout may be appealing, there are also compelling reasons to choose the annuity option. Perhaps the biggest benefit of an annuity is that the income is guaranteed for life. While you could outlive your lump-sum payment, it’s usually not possible to outlive an annuity pension payment.

The annuity option could also protect you from yourself. MetLife recently studied pension plan participants. Of the participants who took a lump sum, 21 percent depleted it. On average, the funds were depleted in just under six years.1 That kind of behavioral risk doesn’t exist with the annuity option.

Finally, there could be options available to share the benefit with your loved ones after you pass away. Some pension plans offer annuity options with survivor benefits. The payment may continue for a spouse or continue for a certain number of years after your death.


Best of Both Worlds

You may want to explore strategies that provide some level of control and flexibility along with some guaranteed lifetime income. For example, your pension plan may allow you to take a partial lump sum and then take the remainder in annuity payments.

Another option would be to take the entire pension benefit as a lump sum, but then transfer a portion of it into an annuity contract. The annuity contract could pay a guaranteed income stream either now or in the future, and you could use the remainder of the lump sum to fund other goals.

Ready to explore your pension options? Let’s talk about it. Contact us at Ambrose Financial & Insurance Services today. We can help you analyze your needs and develop a strategy. Let’s connect soon and start the conversation.




Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.

16766 – 2017/6/20