How do I compare a pension lump sum to an annuity?

Calculate how many years of monthly payments equal the lump sum (break-even age). Then assess: do you expect to live past that age? Consider inflation, investment alternatives, survivor benefits, and tax treatment of each option.

What is the pension transfer value?

In UK DB schemes, a Transfer Value (CETV) is offered when you leave or retire. It represents the actuarial present value of your entitlement. Compare to the annual income foregone using the break-even method and standard of living analysis.

What risks are associated with taking the lump sum?

Investment risk (must achieve returns to match pension income), longevity risk (outliving the lump sum), inflation risk (must generate real returns), and complexity. The monthly pension is simpler and provides certainty.

What risks are associated with taking the annuity?

Inflation risk if not CPI-linked, counterparty risk (pension fund or insurance company solvency), loss of flexibility, and death before break-even. In the US, PBGC provides some protection for private pensions.

How does the annuity factor work in pension calculations?

The annuity factor converts a monthly pension to its lump sum equivalent. Factor = 12 x present value annuity factor for the pension duration. Example: annuity factor 20 means $1,000/month pension = $240,000 lump sum equivalent.

Defined Benefit Pension Lump Sum vs Annuity Comparison Calculator

Compare taking a defined benefit pension as a lump sum or lifetime annuity. Break-even analysis, inflation risk, longevity risk, investment risk, and tax implications of each option.

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Frequently Asked Questions

How do I compare a pension lump sum to an annuity?

What is the pension transfer value?

What risks are associated with taking the lump sum?

What risks are associated with taking the annuity?

How does the annuity factor work in pension calculations?