Cash Out Pension or Take Annuity?
Written & reviewed by Hans Goldstein, EA, Independent Licensed Insurance Producer · CA license 4273294 · NPN 20602398Admitted to practice before the IRS
Last reviewed 2026-10-03
Short answer
Should I take my pension as a lump sum or monthly payments?
Compare the monthly check with what the lump sum would buy. Get an immediate annuity quote for the lump sum amount, with the same survivor option: if the insurer pays more per month than the pension, the lump sum wins on income; if the pension pays more, or it has a cost-of-living adjustment, the monthly payment usually wins.
Lean toward the monthly pension if you are healthy, married and your spouse needs the survivor benefit, or you would be tempted to spend a lump sum. Lean toward the lump sum if your health is poor, there is no COLA, or you want money left for heirs. If you take the lump sum, roll it directly to an IRA so the plan does not withhold 20% for tax.
TL;DR: The pension buyout (lump sum) wins when: (1) the employer's monthly offer is below the implied SPIA rate for your age, (2) there's no COLA, (3) you have above-average longevity uncertainty, (4) you want IRA flexibility or legacy planning. The monthly wins when: COLA is full, you live well past 85, your spouse depends on survivor benefits, or you don't trust yourself with a lump sum. Below: IRR tables by age and plan type showing when each option wins.
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The math under the hood: how to actually compare
The employer presents two numbers: lump sum X, or monthly Y for life. To compare:
- Calculate the IRR (internal rate of return) the employer is implicitly offering by paying you Y/month from age N for life
- Compare that IRR to: (a) commercial SPIA rate at age N, (b) safe portfolio withdrawal rate, (c) MYGA rate if you want to wait to annuitize
- If commercial SPIA pays more per month than employer offer for the same lump sum → take lump sum, buy SPIA
- If portfolio + MYGA generates better lifetime income with growth optionality → take lump sum, build portfolio
- If employer monthly with COLA + survivor beats both → take monthly
IRR table: when buyout wins vs when monthly wins (June 2026 rates)
| Age | Plan offers monthly | Lump sum offer | Implied employer IRR | Commercial SPIA equivalent | Better choice |
|---|---|---|---|---|---|
| 62 | $3,000/mo single life no COLA | $500,000 | ~5.4% | $2,750/mo at same premium (SPIA) | Monthly |
| 65 | $3,500/mo single life no COLA | $500,000 | ~6.6% | $3,250/mo at same premium | Monthly (slight) |
| 65 | $3,000/mo joint 50% no COLA | $500,000 | ~5.6% | $3,100/mo single + $14K life ins | Lump sum, run "pension max" |
| 67 | $4,000/mo single life no COLA | $500,000 | ~7.7% | $3,650/mo at same premium | Monthly |
| 70 | $4,000/mo single life no COLA | $500,000 | ~7.9% | $3,550/mo (M70) at same premium | Monthly |
| 65 | $3,000/mo single life w/ 3% COLA | $500,000 | ~7.5% (real value) | $3,250/mo no COLA | Monthly (COLA decisive) |
| 62 | $2,500/mo single life no COLA | $500,000 | ~4.2% | $2,750/mo SPIA at premium | Lump sum → SPIA wins |
| 55 | $2,000/mo single life no COLA (deferred to 65) | $300,000 | ~4.8% | MYGA at 5.95% then SPIA at 65 = $3,200/mo | Lump sum → MYGA ladder |
Patterns:
- When employer monthly IRR < commercial SPIA equivalent: lump sum wins (often happens with under-funded private plans)
- When employer offers full COLA: monthly almost always wins
- For younger pensioners (pre-65), deferring annuitization via MYGA usually beats taking the discounted monthly early
- For joint coverage, "pension maximization" (single life + life insurance) sometimes beats joint-survivor reduction
When MYGA rollover dominates both options
A common situation: 58-year-old offered $400,000 lump sum or $2,000/month single life starting at 65. Most buyers take the monthly. The MYGA rollover often crushes both:
- Lump sum to traditional IRA: $400,000
- $200,000 into 7-year MYGA at 6.05%: grows to $300,884 by age 65
- $200,000 into 10-year MYGA at 6.20%: grows to $364,818 by age 68
- At 65, buy SPIA with the matured 7-year: $300,884 generates ~$1,775/mo for life
- At 68, buy another SPIA with the matured 10-year: $364,818 generates ~$2,500/mo for life
- Combined: $4,275/mo lifetime income starting at 68, vs. $2,000/mo from employer monthly
The MYGA ladder + delayed SPIA approach more than doubles the income because: (1) commercial SPIA rates beat employer pension actuarial assumptions, (2) tax-deferred MYGA growth beats the employer's implicit discount rate, (3) delaying SPIA to 68 captures more mortality credit than starting at 65.
When the lump sum is a trap
- You take the lump sum as taxable cash (not rolled to IRA): immediate 30-45% tax bill
- You roll to IRA but invest in poorly-diversified speculative assets
- You spend the lump sum on expensive purchases (boat, house addition, business that fails)
- You give large gifts to family who then expect more
- You feel obligated to "manage" the lump sum aggressively to beat the monthly, then over-trade and lose
Academic studies consistently find that 25-40% of lump-sum recipients deplete the money within 10 years of receipt. If you suspect you'd be one of them, take the monthly. It's a forced savings mechanism.
Carrier risk: PBGC for private, state guaranty for SPIA
| Source of income | Backed by | 2026 limit |
|---|---|---|
| Private corporate pension (monthly) | PBGC | ~$7,107/mo at age 65 for retirees |
| Multi-employer union pension | PBGC (different limit) | ~$12,870/yr per year of service |
| State / municipal pension | State law / pension trust funding | Varies; no federal backstop |
| Federal pension (FERS, military) | U.S. Treasury | Unlimited |
| Commercial SPIA from A-rated carrier | State guaranty fund | $250-300K per owner per carrier |
For underfunded private corporate pensions where the PBGC cap may bind, the lump sum + SPIA route can actually offer MORE protection than the monthly pension. Split $500K across two A+ carriers and you're fully covered ($250K each); a $500K private pension monthly stream exceeding the PBGC cap has unsecured exposure.
Tax timing: when monthly's "ordinary income forever" loses to lump sum
- Monthly pension: taxed as ordinary income in year received, every year, forever
- Lump sum rolled to IRA: tax-deferred, you control timing
- Lump sum into MYGA inside IRA: tax-deferred plus rate certainty
- SPIA inside IRA: each payment taxed as ordinary income (similar to pension)
- SPIA outside IRA (non-qualified): exclusion ratio gives part of each payment back tax-free
The tax flexibility argument favors lump sum when the buyer wants to: (1) execute Roth conversions in low-income years, (2) make qualified charitable distributions, (3) bunch deductions, (4) optimize for IRMAA thresholds. Pension monthly forces the income flow whether you want it or not.
The decision flow in one diagram
- Calculate commercial SPIA quote at your age for the lump sum amount
- Compare to employer monthly offer
- If SPIA monthly > employer monthly by 5%+: take lump sum → SPIA
- If employer offers full COLA: take monthly (COLA is very hard to replicate)
- If your spouse needs survivor income AND joint-survivor isn't punitive: take joint monthly
- If you have above-average longevity AND no COLA: probably take lump sum → MYGA ladder → SPIA at 75+
- If you suspect you'd spend the lump sum: take monthly
- If you have legacy goals AND no spouse-dependency: take lump sum → IRA
Independent IRR analysis of your buyout vs monthly options
Independent review of your specific decision.
Your employer's actuary uses one set of assumptions. Commercial SPIA carriers use different ones, often more favorable to the buyer. Get an independent IRR analysis comparing your specific lump sum offer to the commercial SPIA equivalent at your age, plus a MYGA rollover model if delayed annuitization makes sense.
Rather talk it through? Or book 15 minutes on Hans’s calendar, or call 213-414-2808.
Hans Goldstein · 213-414-2808 · NPN 20602398, independent licensed insurance producer appointed with multiple A-rated carriers
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Frequently Asked Questions
Related reading
- Pension Lump Sum vs Monthly Decision Guide
- Is Annuity Good for 70-Year-Old
- Highest Paying MYGA Rate This Week
- MYGA Laddering Strategy
- Annuity Commission Disclosure
- NQ Deferred Annuity
About Hans Goldstein: Independent retirement income specialist. CA Life License #4273294. NPN #20602398. Phone: 213-414-2808. Email: hans@hansgoldstein.com.
Disclosure
This article reflects publicly available product materials, carrier rate sheets, and approximate rates and tax law as of the date stated above. Annuity rates, caps, participation rates, payout factors, crediting methods, commission structures, and pension regulations change frequently. Always confirm current values against the most recent carrier disclosure document, plan summary, and actual contract before making any decision. This is general education, not a personal recommendation or an offer of any product. Hans Goldstein is an independent licensed insurance producer (NPN 20602398) appointed with multiple A-rated carriers across the annuity and long-term care insurance market; producer's specific appointment status with any carrier discussed may vary, and discussion of any carrier is not an endorsement or representation of carrier appointment. No compensation has been received from any carrier in connection with the publication of this article. Always read the actual contract, summary plan description, or pension election form, and consult a licensed advisor and tax professional before purchasing any annuity, accepting a pension election, or executing a rollover. Annuities are long-term contracts with surrender charges and are not suitable for funds you may need before the end of the surrender period. Tax discussion reflects federal tax law as of 2026 and is subject to change. State tax treatment varies. PBGC coverage limits and pension plan termination rules are set by federal statute and may change.