Lump Sum or Annuity: Which One is Better?

by | Dec 29, 2022

Although pensions have become less common nowadays there are still many workers who have a pension plan sponsored by an employer. If you are one of these workers you will have to decide at some point whether to take your pension benefits as a lump sum or as an annuity. There are advantages and disadvantages to both options that you should be aware of before you ultimately make this choice for funding your retirement years. 

Lump sum 

Choosing a lump sum benefit from your pension means you will receive one large benefit payment when you retire. 


If you decide on receiving an annuity you will not receive all of your pension benefits in one payment. Instead, you will be paid regularly occurring distributions from the pension fund. These payments can arrive annually, quarterly, or monthly. 

Why would you choose a lump sum payment? 

Receiving a lump sum payment has several advantages that you should consider when planning how to manage your pension benefits for your golden years. If you have large amounts of debt that you still owe, receiving a lump sum pension payment can help you to take care of that debt so you will not have to worry about it during retirement. After you have paid off your debt, any remaining funds can be left to your intended beneficiaries through a well-crafted estate plan. Another benefit of a lump sum is that you will have the opportunity to invest large sums of capital immediately. 

Drawbacks of a lump sum option 

On the other hand, there are drawbacks that you should take into consideration before choosing a lump sum option for receiving pension benefits. Receiving all of your pension benefits upfront means you bear the responsibility of managing the assets. This could result in your retirement funds running out too early which can be a problem when you start approaching the end of your life. 

Why choose an annuity benefit payout? 

Going with an annuity option for your pension benefit payout does have some advantages over a lump sum payout. An annuity will provide you with a steady stream of income for the remainder of your life. You may also be able to pass on this income to your intended beneficiaries after you pass away. 

Drawbacks of choosing an annuity option 

An annuity does have its own disadvantages which you should weigh before making your final decision on how to receive your pension benefits. Since you will not receive all of your pension benefits at once you will be limited in your options on how you can use your funds. Along with less financial flexibility you may also end up dying before you can use all of your benefits. Some pension annuities are not transferable to your heirs. Also, if you develop a serious medical condition your annuity payments may not be enough to cover your healthcare costs. 

How to make your decision 

Carefully consider your personal needs and retirement goals when deciding on whether to receive a lump sum or annuity pension benefit payout. For example, if you are not in good health receiving a lump sum might be the way to go. Talk to a professional financial advisor to help you weigh your options.