Pension: lump sum or annuity?

Traditional pensions — defined benefit plans — are rare today but still exist in government, education, healthcare, and some older private-sector jobs. When you leave the job, you're usually offered a choice: take a lump sum now, or receive monthly annuity payments for life. The choice is often more consequential than people realize, and the default option is rarely optimal.

The case for the annuity

• Guaranteed income for life, regardless of how long you live. You can't run out of money from it.
• No investment decisions to make. No panic during market crashes.
• Survivor benefits often continue to a spouse.
• For pensions backed by federal PBGC insurance, some protection even if the employer goes bankrupt.

The case for the lump sum

• Full control over the investment, withdrawal timing, and tax planning.
• The balance is an asset you can leave to heirs; annuity payments usually die with you (or the surviving spouse).
• If the pension fund is underfunded or the employer is shaky, taking the money now removes that risk.
• Inflation protection. Most pensions offer no cost-of-living adjustment; an invested lump sum can grow with inflation.

What most people should do

If you have significant other retirement savings (401k, IRA, brokerage), the annuity is usually worth keeping — it's longevity insurance you don't have to buy. If your pension would be your primary retirement income, the annuity's guarantee is even more valuable. If you have a large estate and health concerns, the lump sum might win. This is one of the few retirement decisions where an hour with a fee-only advisor is often worth the cost.