Have a Pension Benefit? – Decision Time

June 8th, 2023 by Blake Pinyan

Pensions used to be the primary retirement benefit for employees, representing a promise to pay a certain amount of money based on years of service and compensation. However, due to their high costs and administrative complexities, pensions are now rare, with most employers opting for defined contribution plans like 401(k)s. For those fortunate enough to have a pension plan, a crucial decision awaits them when it’s time to retire and turn it on: whether to receive a lump-sum payment or opt for an annuity. This article explores both options and highlights important considerations to help individuals make an informed choice.

Lump-Sum Pensions

A lump-sum pension is a straightforward cash payment that can be directed to a bank account, a pre-tax IRA, or a pre-tax 401(k). The value is determined by interest rates, years of service, and the employee’s compensation during their tenure. Since pension money is pre-tax, transferring to a non-qualified bank account would result in a significant tax burden as it will be taxed as ordinary income. Therefore, most individuals prefer to transfer their lump-sum pension to a qualified retirement account.


An annuity entails receiving a set of guaranteed payments over a specified period. The value is determined by interest rates, years of service, compensation, retirement age, and life expectancy. The later the retirement age, the higher the payments. This is because the payout period (life expectancy) is expected to be shorter. Ultimately, the duration will depend on the type chosen upon claiming the pension benefit. The options usually presented to pension participants include Single Life, where payments last for the retiree’s lifetime, and Joint and Survivor, where payments continue for both the retiree and their spouse’s lifetime. A single-life annuity offers higher payment amounts compared to a joint and survivor annuity since the pension fund only covers one life. The survivor benefit in a joint and survivor annuity can vary, such as 25%, 50%, 75%, or 100% of the retiree’s payment. A higher survivor benefit leads to a lower monthly payment and vice versa.

Considerations for Choosing Lump-Sum or Annuity

While a calculation can help determine which option yields a higher value, it’s essential to consider various factors beyond the numbers and understand the tradeoffs. For example, opting for a lump-sum pension provides retirees with the flexibility in controlling the amount and frequency of withdrawals from their retirement plan. But, the retiree loses the security of a guaranteed income stream with the lump-sum election, that they get with the annuity. Choosing an annuity protects against portfolio value fluctuations caused by changing markets, but some annuities may not include annual cost-of-living adjustments, making it challenging to keep up with inflation. To make the optimal decision, individuals should assess their risk tolerance, cash flow needs, and financial goals. There’s not a universally right choice, the answer depends on a retiree’s unique circumstances and financial situation. Seeking professional advice can help in analyzing these considerations.

Interest Rates’ Impact on Lump-Sum Pensions and Annuities

Understanding the relationship between interest rates and lump-sum pension values is crucial when making a decision. When interest rates rise, pension lump-sum values decline. When interest rates decline, lump-sum pension values rise. It’s an inverse relationship. During low-interest rate environments, this has not posed an issue, but with recent rapid rate increases, many individuals have witnessed their lump-sum pension values decrease substantially. For annuities, higher interest rates generally lead to higher annuity payments, while lower interest rates result in lower payments.

Timing and Retirement Planning

Companies often use interest rates from a previous year to determine payouts for the following year, presenting an opportunity for individuals to claim higher lump-sum pension values during periods of low-interest rates. However, not everyone seizes this opportunity, leading to significant decreases in lump-sum pension values when interest rates rise. It is important for those eligible to receive pensions to comprehend this dynamic and consider it in their retirement planning. Retiring in a low-interest-rate, high-lump-sum-pension-value market can make a substantial difference, potentially amounting to hundreds of thousands of dollars. The opposite holds true as well, retiring in a high-interest-rate, low lump-sum-pension-value market could be damaging to a retiree’s financial future. Therefore, it’s prudent for those seeking the lump-sum pension to evaluate the current interest rate market and expectations for the future. From a planning standpoint, delaying retirement to be in a low interest rate market could be a sound strategy, especially if the difference is hundreds of thousands of dollars.


It is essential to invest the necessary time to thoroughly analyze the decision of whether to choose a lump-sum or annuity when claiming your pension benefit. Retirement planning involves numerous crucial choices, and each decision can significantly impact your financial well-being. Since you only have one opportunity to get it right, it becomes critical to carefully consider all the scenarios that may affect your nest egg. Always remember, it’s not just about what you make, but ultimately what you keep that truly counts!