Pension: Lump Sum vs. Annuity (Part 1)

This is Part One of a two-part video blog on pensions. Click Here for Part Two.

Individuals with pension plans often have big decisions to make regarding receipt of those dollars.  Options typically offered are a lump sum distribution (which many would rollover to an Individual Retirement Account) or lifetime monthly payments that may also include continued benefits for a surviving spouse.  The choice between a lump sum and lifetime monthly income is often a one-time, irrevocable decision and, therefore, shouldn’t be taken lightly.

Now, there are pros and cons to each of these choices.  In this discussion, let’s focus on potential advantages of the lifetime monthly income.  Then, in a second video we’ll discuss the potential advantages of a lump sum payout.

  1. One potential benefit is guaranteed monthly income for life. That kind of speaks for itself.  As long as the pension fund remains financially stable, this income will continue for as long as I live – even if I live well past age 100.  It’s also important to understand whether your pension is covered by the “PBGC” or Pension Benefit Guaranty Corporation.  The PBGC is an independent agency of the United States government that was created by the Employee Retirement Income Security Act of 1974 (ERISA) that serves as insurance protection and would continue to provide payments to you if the pension fund were to go bankrupt. Now, the PBGC pays pension benefits up to a maximum guaranteed benefit set by law so you’ll want to understand whether your full benefits would be protected.
  2. A second potential benefit may be clear spending guidelines. If I’ve been saving part of my income for 30, 40 or more years, it may be very difficult for me emotionally to transition from saving to now spending from this “nest egg.”  My fear of running out of money may cause me to be overly conservative in my account withdrawals for spending…possibly making my earlier years of retirement less enjoyable.  However, having a “guaranteed” pension income – in addition to Social Security – may provide the confidence I need to spend more in early retirement and have less stress.
  3. Another potential benefit is simplicity. Some people like the simplicity that may relieve stress and provide more enjoyment during retirement.  A monthly benefit for life can provide this as I wouldn’t have to be concerned about how to invest these dollars and could avoid the ups and downs of investing.

These are a few common reasons people may choose a lifetime monthly income.  In another video, we’ll share potential advantages of choosing a lump sum pension distribution.  The most important thing to remember is the potential magnitude of such a decision.  So be sure to understand all your options and then make a thoughtful decision for yourself and your family.  Thanks for watching!

If you find yourself wondering about these different options, you are not alone.  Let’s start a conversation as we are purposely built to help.


Published: September 4, 2015terry

Authored by: Terry Prather, CFP®, ChFC®

Direct Phone: 812-602-6307


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The information in this material is only as current as the date indicated, and may be superseded by subsequent market events or for other reasons. While all information prepared in this document is believed to be accurate, any statements of opinion constitute only current opinions of Payne Wealth Partners, Inc., which are subject to change and which Payne Wealth Partners, Inc. does not undertake to update. Accordingly, you should not put undue reliance on these statements. The information does not attempt to examine all the facts and circumstances that may be relevant to an individual’s financial needs. Payne Wealth Partners, Inc. is not soliciting any action based on these statements.

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