Pension vs. Lump Sum Payment

AS COMPANIES LOOK TO REDUCE their pension liabilities, many are making this offer to former employees: Instead of paying you a regular pension in retirement, we’ll give you a lump sum now.

The lump sum might seem sizable. But to see whether it’s truly a good deal, find out how much income that lump sum would buy if you purchased a so-called deferred income annuity. These annuities pay regular income starting at some future date. In this instance, you’d probably want to know how much income you would receive as of age 65, which is when your pension would likely start paying. You can get quotes from sites such as:

If your pension will be payable to your spouse, assuming you die first, be sure to get a quote for an annuity that pays income for both your lifetime and that of your spouse.

In all likelihood, you will find that the lump sum is less valuable than the pension income you’re set to receive, and you shouldn’t take the offer. Who should? If you are in poor health—and so is your spouse, assuming you’re married—accepting the offer might make sense. The offer might also be appealing if you have serious doubts about the financial health of the pension fund.

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