Retirement Lump Sum or Pension Payments?

It is a commonly held belief that when confronted by a situation in which you have to choose between a lump sum and scheduled payments, you’re better off selecting the long-term payment plan since it will result in more money over time. Despite this general knowledge, most people end up taking the lump sum, which is more money right now (albeit less in the long run). But when it comes to accepting a lump sum or opting for pension payments when you retire, is one path preferable to the other? How do you know which one to choose? In truth, there are a few things you need to know about the potential benefits and drawbacks of each before you can make an informed decision. And the one that’s right for you will depend largely on your personal situation.

The first thing you need to understand is that pensions are generally a guaranteed life annuity. What this means is that they will begin to pay at the point of retirement and continue paying out until the time of your death, after which any remaining funds will be passed on to a named beneficiary (usually a spouse) or they will be forfeit. So regardless of the amount of money accumulated in the pension, the sum you receive will depend largely on your longevity. That said, when a lump sum is offered in exchange for scheduled payments, it is nearly always going to be of lesser value than the total of the annuity fund. Still, there are several reasons to carefully consider both options.

Suppose you are dealing with a chronic illness that is likely to cut your life short. In this case you may want to take the lump sum in order to pay medical bills and perhaps even take a few trips or have some fun in the meantime. After all, you can’t take it with you. Alternately, you might want to use some of the money to set up trust funds for a spouse, children, or grandchildren, or make donations to charity as a way to ensure that your pension funds aren’t lost when you pass away. Although you’ll take a slightly smaller amount of money than you might have had, it could end up paying off for you considering that your loved ones would lose out in the event of your early passing.

On the other hand, more and more adults find themselves reaching the age of retirement these days in excellent health and with the prospect of several more decades of life to enjoy. With a long road ahead, you may be keen to have monthly or annual payouts to look forward to as a way to continue living the lifestyle to which you’ve become accustomed. You might not want to lose money on both the lump sum payment and related taxation, especially considering that a massive payout could lead to owing a larger percentage to the government. Or you may not be confident in your abilities to wisely manage such a large chunk of change. In truth, you might want to learn more about your options before you make a decision. By considering the pros and cons and applying them to your own situation you should be able to determine which type of payment best suits your needs.


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Jenni Proctor

Hi, I'm Jenni Proctor from Boomers Next Step. Remember when the formula for success in life was simply to strive for good marks at school, gain qualifications, get a great job, work hard and save for your retirement? Yes, I believed it too! For years my husband David and I wanted to develop a business that we could operate anywhere in the world, but both of us were educated to be employees.  We had entrepreneurial dreams and ideas, but still had employee mindsets. 14 years ago I took the giant leap!  I left my job in Education to start a business as a Career Counsellor and Coach, helping mature adults transition from one career path to another, and particularly from employment to entrepreneurship.  I had studied long and hard to gain new qualifications but sadly I hadn’t learnt how to market my new business. About 12 years ago we realized that we were not tracking well towards having the sort of retirement we wanted. We’d saved; we’d invested; and like so many other people we’d also lost some money along the way. It didn’t help that my business was not bringing in as much as I had been earning as an employee. Our dreams of extensive travel and helping our family were being replaced by a growing concern that we would outlive our savings. It seemed that a traditional retirement would not allow us to maintain the lifestyle we wanted. I love helping people plan the next phase of their lives, but we realized that was not going to be enough.  We needed a way to create an income stream that would pay for the travel and other lifestyle luxuries we wanted, that would provide mental stimulation, and would interest us both.

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