Retirement income · comparison
Pension Lump Sum vs. Monthly Annuity
Updated 2026-10-21 · Gregory Garone, CEPA®
Short answer: The annuity is lifetime income with longevity protection built in. The lump sum gives you control and something to leave heirs, but you take on the investment and longevity risk. A useful first test is the annuity’s payout rate: what the annual payment is as a percentage of the lump sum, compared with what that sum could safely produce or buy elsewhere.
Take the lump sum vs. Take the annuity, side by side
| Question | Take the lump sum | Take the annuity |
|---|---|---|
| Income for life | Only if you invest and withdraw carefully, or buy an annuity | Yes, guaranteed by the plan |
| Investment risk | Yours | The plan’s |
| Money left to heirs | Whatever remains in the account | Only through the survivor option you choose; usually nothing after both deaths |
| Effect of interest rates | Higher rates generally mean a smaller lump sum offer | Monthly amount is set by the plan formula |
| Protection if the employer fails | None needed once rolled over | Private plans are insured by the PBGC up to legal limits |
| Taxes | No tax if rolled directly to an IRA; withdrawals taxed later | Each payment taxed as ordinary income |
When each one tends to fit
Take the lump sum may fit when
- You have health concerns that shorten your expected lifespan.
- You already have enough guaranteed income from Social Security and other pensions.
- You want flexibility or to leave money to heirs.
Take the annuity may fit when
- You want income you cannot outlive and would rather not manage investments.
- Longevity runs in your family.
- The plan’s payout rate is better than what a comparable commercial annuity would pay.
An example
Illustration only: a plan offers a 65-year-old either $500,000 or $3,000 a month for life. The annuity pays $36,000 a year, a 7.2% payout rate, and returns the lump sum’s value in nominal dollars after about 14 years, at age 79. If an insurer would charge more than $500,000 for the same lifetime income, the plan’s annuity is the better deal on price alone. Survivor options and inflation still need their own comparison.
Questions to bring to your CPA or advisor
- What is the payout rate, and what would an insurer charge for the same income?
- Which survivor options are available and what does each reduce the payment to?
- Does the annuity have any cost-of-living adjustment?
- Is the plan well funded, and what PBGC limit would apply?
Common questions
Why do lump sum offers change from year to year?
Plans convert the annuity to a lump sum using IRS-prescribed interest rates and mortality tables. When those rates rise, lump sum values usually fall.
Is a lump sum taxed if I take it?
Rolled directly to an IRA or another plan, it is not taxed until withdrawn. Paid to you, 20% is withheld and the full amount is taxable that year.
What is a joint and survivor annuity?
A payment that continues to a surviving spouse at a set percentage, such as 50%, 75% or 100%, in exchange for a smaller payment while both are alive.
Can I take part as a lump sum and part as an annuity?
Some plans allow a partial lump sum. Many do not, so check the plan’s election forms.
Sources and limitations
More comparisons
- Convert to Roth vs. Keep it traditional
- Charitable remainder trust vs. Donor-advised fund
- Charitable lead trust vs. Charitable remainder trust
- Earnout vs. Seller note
- Use NUA vs. Roll it all to an IRA
- Claim at 62 vs. Wait until 70
- Roth 401(k) vs. Traditional 401(k)
- Donor-advised fund vs. Private foundation
- GRAT vs. Sale to an IDGT
- Sell to an ESOP vs. Sell to a third party
- All comparisons
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