Should I take the Traditional Pension or Lump Sum Payment
By Steven Drahozal, revised June 6, 2025
As you approach retirement, you may discover some new decisions ahead of you. Many companies are giving you an unexpected retirement choice:
• Take the traditional pension, or,
• Take a lump sum payment instead of a pension.
Every pension buyout offer is unique, and the decision can be confusing. Every individual’s circumstances are unique, and any decision should be based on various personal factors. Sometimes the easiest solution is not the best. Consider the following example.
Ralph and Ed are retiring at the end of the month from ABC Industries. They started at the same time, held the same jobs, in different departments, and are making the same income. Both are 65 years old, married, and their wives are also 65 years old.
Currently, ABC Industries is giving its employees who are retiring a choice of retirement plans. A retiree may take a traditional pension or a lump sum payment instead of a pension. The lump sum payment can be taken as a taxable cash payment or could be transferred tax-free into an IRA of their choice.
Ralph did a little research and found that her could get a better pension-like payment if he took his lump and deposited it into what he called a Personal Pension IRA, or PPI for short. He chose the PPI because it paid a guaranteed joint lifetime income to both him and his wife, an income they could not outlive, much like a traditional company-sponsored pension. The feature Ralph liked most was that, unlike a company-sponsored pension, any funds left over after both he and his wife passed away would be paid to his kids.
A Personal Pension IRA uses an annuity from an insurance company. In Ralph’s case, he chose a mix of fixed indexed annuity IRAs from a few highly rated insurance companies, with the income guarantees based on the full faith and credit of each insurance company. Each of these IRA annuities had a joint lifetime income rider that would pay Ralph and his wife a lifetime of income, regardless of how long they live. The risk that they will live a long life and might otherwise run out of money is with the insurance company.
Ralph had a choice of taking a level pension-like income or, for a little less at the start of the income, one that could be adjusted for inflation over time. The way Ralph set it up, he expects to see an increase in income as they get older, providing him and his wife with a hedge against inflation. However, if they die early on in retirement, their heirs inherit what is left over from the original lump sum payment.
Ed didn’t want to bother looking around or deciding between the traditional pension or a lump sum payment. He decided to take the traditional pension. Ed likes the fact that the Pension Benefit Guaranty Corporation (PBGC) from the Federal Government insures the ABC Industries pension. The federal government and the PBGC cover all ERISA pension plans to ensure that retirees will receive their pension payments, subject to certain limits.
Even if the PBGC has to take over the pension because ABC Industries goes out of business, Ed and his wife expect the same income for the rest of their lives, with no likelihood of their income going up. Sadly, if Ed and his wife pass away early in retirement, their heirs will inherit nothing.
To get started with his research on whether to choose a traditional pension or a lump sum payment, Ralph sought the advice of an independent financial professional. He specifically avoided his bank, stockbroker, and insurance agent, feeling their advice might be less objective and could be limited by the company each represented.
The person Ralph chose to work with offered a wide range of product choices from multiple insurance companies. His financial professional worked with Ralph to satisfy his specific goals, needs, and objectives. This financial professional utilized a variety of third-party applications and other analyses, enabling Ralph to select the best income from the best insurance companies.
Ralph could have invested his lump sum payment in almost any type of IRA, rather than in a fixed index annuity with a joint lifetime income rider. Without the guarantees provided by the insurance company, Ralph could face the risk of losing his income in the future. If he lost the lump sum to a bad investment or low interest rates, and the lump sum balance reached zero dollars ($0), so did the source of his income. His paycheck (his income) would stop.
Ralph preferred a sure thing, rather than a maybe. His Personal Pension IRA (Ralph’s fixed index annuity with a joint lifetime income rider) and a traditional pension both provide guarantees that a retiree will always be receiving a paycheck.
Is the lump sum buyout best for everyone? No. The decision should be based on your individual circumstances and personal goals, needs, and objectives. You should seek out a financial professional to help you understand your options. You should compare your traditional pension income to what you might be able to do with a lump sum payment before making a decision.
About the Author:
Steve helps people think about their money. Steve gives independent, objective advice to retirement and beyond.
Steve is a small business owner who also runs an insurance agency. His business, the Wealth & Income Management Group, LLC, offers investment advisory services through Brookstone Wealth Advisors, LLC (BWA), a registered investment advisor. BWA and Brookstone Capital Management, LLC are affiliated companies. BWA and the Wealth & Income Management Group are independent of each other.
Steve also runs the Mature American Planning Company, a Michigan corporation and insurance agency. Insurance products and services are not offered through BWA. BWA and the Mature American Planning Company are independent of each other.
Brookstone Disclosure:
Any comments regarding safe and secure products, and guaranteed income streams refer only to fixed insurance products. They do not refer, in any way to securities or investment advisory products. Fixed Insurance and Annuity product guarantees are subject to the claims‐paying ability of the issuing company and are not offered by Brookstone.
Index or fixed annuities are not designed for short term investments and may be subject to caps, restrictions, fees and surrender charges as described in the annuity contract. Guarantees are backed by the financial strength and claims paying ability of the issuer.
Please refer to our firm brochure, the ADV 2A Item 4, for additional information.