Pension: Lump Sum or Income?
The useful question is not which number is bigger. It is what return the pension implies on the lump sum you would give up - because that is the figure you would have to beat yourself, with none of the guarantee.
The pension implies a return of
0%
- Pension each year
- $0
- You would have to beat
- 0%
- Years to match the lump sum
- -
- Total the pension pays
- $0
- Your spouse would keep
- -
Where the money goes
Each block is sized by its share, so you can see whether years to match the lump sum or total the pension pays is the bigger part without reading a single number.
Move it and watch
-
at {v} for lump sum offered
And what you can change
Why your own figure may differ
What return you would need to match it
The pension is a fixed benchmark. This is what taking the lump sum has to achieve to be worth it.
| If you earned | The lump sum lasts | Against the pension |
|---|
Implied return = the yearly pension divided by the lump sum. It is the plain yearly return the pension hands you on the money you would be giving up. Beating it by investing means beating it every year, for as long as you live, without ever running out.
pension lump sum or income: real examples
Three offers, and how to judge them. Click any card to load it.
- The usual offer
$400,000 or $2,200 a month
A typical choice at retirement.
The pension implies a 6.6% return, guaranteed for life. At 5% you would not beat it by investing the lump sum yourself.
Load this scenario in the calculator → - If you can beat it
The same offer at 8%
A more confident investor.
At 8% you would beat the 6.6% the pension implies - if that return actually arrives. The pension needs no such luck.
Load this scenario in the calculator → - A pension that rises
The same offer, with increases
The income keeps pace with prices.
The total paid climbs sharply. A pension that rises with prices is worth far more than one that does not, and many people never ask which theirs is.
Load this scenario in the calculator →
Common questions about a pension lump sum or income
How do I compare a lump sum against an income for life?
Not by asking which number is bigger. Work out what return the pension income represents on the lump sum you would be giving up. That is the figure you would have to beat by investing it yourself, with none of the guarantee. If you cannot confidently beat it, the pension is the better deal.
What does the implied return actually mean?
If a pension pays $26,400 a year and the alternative is a $400,000 lump sum, the pension is handing you 6.6% of that sum every year, for life, guaranteed. To do better with the lump sum you would need to beat 6.6% a year while also never running out. That is a high bar.
Why would anyone take the lump sum?
Control, inheritance, and doubts about the scheme. A lump sum can be left to your family; a pension usually cannot. You can take more in the years you want it. And if you are in poor health, a pension for life is a poor bet. Those are all real reasons.
Does the pension rise with prices?
Some do and most private ones do not. It matters enormously. A pension that never rises loses purchasing power every year for the rest of your life. Tick the box in the tool and watch how much the total changes - it is usually the single biggest factor after the amount itself.
What about my spouse?
Ask what happens to the income when you die before deciding anything. Many schemes pay a reduced amount to a spouse, some pay nothing at all. A single-life pension that pays more now but leaves your spouse with nothing is a decision about their future, and it should be made together.
Is my pension safe?
Ask specifically whether the scheme is insured and up to what limit. Most private schemes are covered by a government-backed guarantee, but usually up to a cap. If your promised income is well above that cap, the part above it carries real risk, and that is worth knowing before you turn down a lump sum.