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Lump sum or annuity?
Your pension offer numbers, your planning horizon, and the return you could earn on the lump sum.
X VS Y COMPARISON · MONEY
Pension Lump Sum vs Monthly Annuity
Your employer offers $X now or $Y every month for life. The right choice is a present-value question — what the monthly stream is worth today at your assumed return — and it moves with interest rates. Enter your numbers and see both sides, the breakeven return, and how long the annuity takes to catch up.
How this comparison works
The annuity is a stream of monthly checks; the lump sum is cash today. To compare them, we discount the checks back to today’s dollars at your assumed return — that’s the annuity’s present value. If the lump sum beats it, you’re being offered more than the payments are worth at that return; if the present value beats the lump sum, the annuity is the better deal on the math alone.
Output · formula · meaning
| Output | Formula | What it means |
|---|---|---|
| Annuity present value | PMT × (1 − (1+r)−n) ÷ r | $900/mo for 17 years at 6%: $114,928 — that’s what the payment stream is worth today. |
| Lump-sum edge | lump − annuity PV | $35,072 in favor of the lump sum at a 6% return. |
| Breakeven return | r where PV = lump | ≈ 2.45%/yr — if you can earn more than 2.5% a year, the lump sum wins; below that, the annuity does. |
| Payback period | lump ÷ monthly ÷ 12 | 13.9 years before the checks add up to the lump sum in raw dollars (no time value). |
Why lump sums shrink when rates rise
This is the single most-misunderstood mechanic. Your employer funds the annuity with a lump sum sized by actuarial factors that fall when interest rates rise — higher rates mean less money today can grow into the same future payments. That’s why offers made during low-rate years looked generous and offers in high-rate years look smaller: neither you nor the plan changed — the discount rate did. If rates rose since your last offer, the lump sum probably fell even though the monthly check didn’t.
Who uses this
- Near-retirees with a pension election: you have one irrevocable choice — see the math for your exact offer before you sign.
- Spouse-and-you planners: the monthly option usually comes in single-life and joint-and-survivor flavors; model the payment you’d actually receive.
- Rollover testers: checking whether taking the lump and rolling it into an IRA beats the annuity’s implied return.
- Rate watchers: comparing a fresh lump-sum offer against one from a lower-rate year — the gap is the discount rate, not a worse deal.
Accuracy & limitations
The model compares pure dollars: it does not model COLA adjustments on the annuity, the value of the PBGC backstop if your employer fails, mortality risk (dying early favors the lump sum; outliving the horizon favors the annuity), health status, or the behavioral risk of spending an invested lump sum. A lump sum rolled directly to an IRA continues to grow tax-deferred; an annuity check is taxed as ordinary income. Model it as the return you’d need to beat the annuity — then decide whether you can earn it without taking risks you wouldn’t otherwise take.
For the lump side, rollover mechanics are in the Roth vs traditional guide; to sanity-check your assumed return, see the compound growth calculator.
Cite this calculatorBright Side Kit. “Pension Lump Sum vs Monthly Annuity.” brightoolbox.com, 2026.
Bright Side Kit. "Pension Lump Sum vs Monthly Annuity." https://brightoolbox.com/pension-lump-sum-vs-annuity/ Accessed October 22, 2026.Frequently asked questions
Is a pension lump sum better than the monthly annuity?
It depends on three numbers: the offer, the payment, and the return you can realistically earn. The breakeven return in the calculator is the tie-breaker: if you can earn more than it, the lump sum wins on the math. But the math isn’t everything — longevity, health, and whether you’ll actually leave the money invested all matter.
Why is my lump sum offer smaller than it was last year?
Interest rates, almost certainly. Lump sums are computed with actuarial discount factors that fall as rates rise — less money today grows into the same future payments when returns are higher. Your monthly annuity offer typically doesn’t move the same way.
Can I roll a pension lump sum into an IRA?
Usually, yes — a direct rollover to a traditional IRA keeps the money tax-deferred and avoids the mandatory 20% federal withholding. Take the check in your own hands instead and the plan must withhold 20%, which you’d have to make up within 60 days to complete a full rollover.
What happens to my pension if my employer goes bankrupt?
Private-sector pensions are backstopped by the Pension Benefit Guaranty Corporation (PBGC), which pays benefits up to a statutory cap if a plan fails. The cap usually covers most ordinary pensions fully — but the annuity, not a taken lump sum, is what the PBGC guarantee protects going forward.
Do I need my spouse’s consent to take a lump sum?
For most private pensions, yes — federal law requires a married participant’s spouse to sign away survivor-benefit rights in writing (usually notarized) before the plan can pay a lump sum or a single-life annuity. The default is the qualified joint-and-survivor annuity.
What is a COLA, and why does it change the answer?
A cost-of-living adjustment raises the monthly check over time. A COLA’d annuity is worth substantially more than a flat one — it raises the breakeven return in your favor. Confirm whether your offer includes one before comparing; most private pensions do not.
What if I outlive my planning horizon?
Then the annuity wins more than the math shows: payments keep coming for life no matter how long you live, while the lump sum is a fixed pot. Run the calculator again with a longer horizon to see the sensitivity — longevity insurance is the annuity’s superpower.