Reviewed September 2026.
A monthly annuity from a defined-benefit pension pays a check for life (and maybe a spouse’s life). A lump sum trades that paycheck for a single dollar amount you can roll to an IRA or take taxable. The “right” election depends on longevity, survivor needs, other guaranteed income, and whether you will invest the lump sum carefully. Rollover steps if you elect cash: Roll a pension lump sum into an IRA.
Comparison table
| Factor | Monthly annuity | Lump sum |
|---|---|---|
| Longevity risk | Plan/insurer pays if you live to 95 | You can outlive the money if withdrawals are high |
| Investment risk | Plan bears market risk (for a traditional DB annuity) | You bear market and sequence risk |
| Survivor | Joint-and-survivor options reduce the monthly check | Heirs can inherit remaining IRA balance (beneficiary rules apply) |
| Inflation | Many private pensions are flat; COLA is uncommon | You can try to invest for growth (with risk) |
| Flexibility | Hard to undo after election | Can re-budget, gift, or buy other products later |
| Creditor / behavior | Steady paycheck discipline | Spending and fraud risk on a large balance |
Social Security already provides some longevity coverage: When to claim Social Security. Cash-flow layering: Gliding into retirement cash, Bucket strategy.
Worked sketch: $2,200/month vs $320,000 lump sum
Casey is 65. The pension quotes $2,200/month single-life annuity, or $1,980/month joint-and-survivor 50%, or a $320,000 lump sum.
| Lens | Rough math |
|---|---|
| Simple payback | $320,000 ÷ $2,200 ≈ 145 months (~12 years) before the annuity “catches” the lump sum in nominal dollars ignoring interest and COLA |
| If Casey lives 25 years | Annuity pays 25 × 12 × $2,200 = $660,000 nominal before survivor features |
| If markets return ~4% net and Casey withdraws carefully | Lump sum might sustain spending, but a bad first decade can break the plan |
Plans set lump sums with IRS interest-rate and mortality assumptions. When rates used in the formula are higher, lump sums often shrink. Ask HR for the rate basis and election deadline in writing.
Nonqualified annuity tax math is a different product family: Annuity exclusion ratio. Some retirees later buy longevity coverage inside an IRA with a QLAC.
Questions that usually decide it
- Do I (and a spouse) already have enough guaranteed income from Social Security plus other pensions?
- Is there a spouse who needs a joint-and-survivor option more than a larger single-life check?
- Will I roll the lump sum (tax-deferred) or spend it (taxable)?
- Can I stick to a withdrawal plan, or will a large balance invite overspending?
Checklist
- Collect annuity options (single, joint, period-certain) and the lump-sum figure with assumptions.
- Map Social Security and other pensions beside the quote.
- Price the survivor tradeoff in dollars per month, not adjectives.
- If leaning lump sum, pre-open the IRA and plan a direct rollover.
- Sleep on the election through the full window; many elections are irrevocable.
Educational only. Not tax, legal, or investment advice. Pension factors and election rules are plan-specific; confirm with the plan administrator and a qualified professional.