Lump Sum or Pension Annuity? How to Decide for Retirement

If you’re retiring and your company offers you a choice between a lump sum payout or a lifetime pension payment, it can feel overwhelming. Which one is better? Which choice protects you and your spouse?

The truth is there’s no universal answer. Just sales pitches that oversimplify the decision. The right choice depends on your personal situation, your goals, and the contractual guarantees available to you. Let’s break it down.

Start With Two Key Questions

Before you even look at numbers, ask yourself:

1. What do I want the money to contractually do?
2. When do I want those contractual guarantees to start?

Your answers will guide the entire process. If you don’t need immediate income, you could roll the lump sum into an IRA and manage it yourself, or consider using a principal-protection annuity, such as a Multi-Year Guaranteed Annuity (MYGA) or a Fixed Index Annuity.

However, if you need income now or want to guarantee a lifetime income for you and your spouse, in that case, you’re looking at a pension annuity, also known as a Single Premium Immediate Annuity (SPIA).

What Your Company Pension Really Is

When your employer offers you a monthly lifetime income option, they’re essentially offering you a SPIA. This is a contract that can start payments within 30 days to a year, depending on how you structure it.

To compare offers, here’s what you should do:

• Get the exact monthly payout quote from your employer.
• Run an apples-to-apples SPIA comparison with outside carriers under the same parameters.

This allows you to see whether the company’s offer beats what’s available in the open market.

The Reality of Employer Offers

Here’s what I’ve found: 85% of the time, the employer’s pension payout is higher than what I can find on the outside.

Why? Because your company wants to keep your money. They know what the market offers, and they often pad their numbers just enough to make staying with them the better option.

That’s not always the case, though. Sometimes the open market beats the company’s offer, in which case a lump sum rolled into a SPIA might be smarter.

Structuring the Pension Correctly

Another critical factor is how you structure the payout. Companies don’t always offer the full range of options you could get in the open market.

You should consider:

• Single Life Only: Higher payout but stops when you die.
• Joint Life: Payments continue for both you and your spouse.
• Cash Refund or Installment Refund: Ensures unused funds go to beneficiaries.
• Period Certain: Guarantees income for a set number of years, even if you pass away.

For married couples or long-term partners, joint-life structures are almost always the best choice. It ensures that income continues uninterrupted for the survivor, providing peace of mind and financial stability.

The Importance of Stability

One more factor: Can your employer back up their promise? Even if their pension offer looks stronger on paper, you need confidence that the company is financially stable enough to pay it out for the rest of your life.

If you opt for an outside annuity company, the risk is transferred to the insurer. In both cases, you want to ensure the institution behind your income stream is rock-solid.

No Do-Overs in Retirement

This is one of the biggest decisions you’ll ever make

and there are no mulligans. Once you choose a lump sum or a pension, the choice is locked in.

That’s why it’s important to slow down, compare all your options, and make the decision based on contractual guarantees, not sales pitches or gut feelings.

Final Thoughts: Focus on Monthly Payment

At the end of the day, retirement comes down to one thing: monthly payment.

• What’s my monthly Social Security benefit?
• What’s my monthly pension income?
• What’s my monthly annuity payment?

Together, these make up your income floor, the guaranteed amount that shows up in your bank account every month. That’s the foundation of your retirement security.

Before you sign on the dotted line, let’s discuss your options. We’ll compare the company’s pension offer to outside SPIAs, review structuring choices, and make sure your decision truly matches your goals.

You’ve worked too hard to get this far, now it’s time to make one of the most important financial decisions of your life with clarity and confidence.