How do I choose between a pension and a lump sum?

Calculate your break-even age. If you expect to live past it, the pension is likely worth more. If your health suggests a shorter life expectancy, or if you want to leave assets to heirs, the lump sum may be better. The break-even age is the single most important number in this decision.

What is the NPV of a pension?

Net Present Value discounts all future pension payments back to today's dollars. It asks: what lump sum today is worth the same as all future pension payments, given a target return? If the NPV is higher than the lump sum offer, the pension delivers more value in today's terms. Use a range of inputs rather than a single figure to understand the sensitivity of your outcome to this variable.

Should I count on investing the lump sum effectively?

Only if you have the discipline to invest it and leave it alone. Many people who take lump sums spend a portion on home improvements, travel, or other expenses, which makes the pension the safer choice by default. The sensitivity table shows how much the break-even age shifts if your returns are lower than expected.

What is a COLA adjustment on a pension?

Cost of Living Adjustment: an annual increase to the pension payment. A 2% COLA keeps purchasing power closer to pace with moderate inflation. A flat (0% COLA) pension loses real value each year as prices rise. This calculator applies COLA to each year's payment individually. Use a range of inputs rather than a single figure to understand the sensitivity of your outcome to this variable.

Does this include taxes?

No. Both options have different tax implications. Pension payments are typically taxed as ordinary income. A lump sum rollover to an IRA defers taxes; a cash distribution triggers immediate tax and potentially a 10% penalty if under age 59.5. Consult a tax advisor before deciding.

How does a lump sum rollover to an IRA work?

If you roll the lump sum directly into a traditional IRA or 401(k) within 60 days of distribution, no taxes are owed at that time. The money grows tax-deferred and is taxed as ordinary income when withdrawn in retirement. This is the most tax-efficient way to take a lump sum if you choose that route.

Pension vs Lump Sum Calculator

Enter the monthly pension amount, the lump sum offer, your expected investment return, and your life expectancy to see the break-even age, net present value of the pension stream, and a crossover chart showing when the pension overtakes the invested lump sum. Everything runs in your browser with nothing stored or transmitted.

How this tool works

The pension vs lump sum calculator compares the total value of accepting a monthly pension against a one-time lump sum payout. Two models run in parallel. Breakeven analysis: Lump Sum / Monthly Pension = Months to Breakeven. If you live past the breakeven age, the pension pays out more total than the lump sum; if you do not, the lump sum was the better choice. Investment model: if you take the lump sum and invest it, the maximum sustainable monthly withdrawal is calculated using the annuity formula PMT = PV x r / (1 - (1+r)^-n), where n is your projected lifespan in months and r is the expected monthly net-of-inflation return. Comparing this withdrawal to the pension benefit shows whether you can replicate or exceed the pension income by self-managing the lump sum. Key assumption: the pension is from a well-funded plan with low default risk. Private-sector pensions are insured by the PBGC up to statutory limits, which may cap the effective benefit for high earners below the stated amount. Edge case: the pension calculation by default shows the single-life benefit. Survivor benefits -- which pay reduced income to a surviving spouse after the pensioner's death -- lower the monthly amount in exchange for continued coverage. Always model the survivor benefit option separately when a spouse depends on the income, using the survivor-benefit toggle that recalculates the pension and the break-even accordingly.

Worked example

Monthly pension: $2,000 (flat, no COLA). Lump sum: $300,000. Investment return: 6%. Life expectancy: 25 years. Annual pension: $24,000. Lump sum at 6% grows to $1,286,000 over 25 years while total pension payments reach $600,000. At a 5% discount rate, the pension NPV is approximately $338,232, which exceeds the $300,000 lump sum in today's dollars, but the invested lump sum easily wins on total value. The decision hinges on your investment discipline and life expectancy.

Official sources

Frequently asked questions

How do I choose between a pension and a lump sum?
Calculate your break-even age. If you expect to live past it, the pension is likely worth more. If your health suggests a shorter life expectancy, or if you want to leave assets to heirs, the lump sum may be better. The break-even age is the single most important number in this decision.
What is the NPV of a pension?
Net Present Value discounts all future pension payments back to today's dollars. It asks: what lump sum today is worth the same as all future pension payments, given a target return? If the NPV is higher than the lump sum offer, the pension delivers more value in today's terms. Use a range of inputs rather than a single figure to understand the sensitivity of your outcome to this variable.
Should I count on investing the lump sum effectively?
Only if you have the discipline to invest it and leave it alone. Many people who take lump sums spend a portion on home improvements, travel, or other expenses, which makes the pension the safer choice by default. The sensitivity table shows how much the break-even age shifts if your returns are lower than expected.
What is a COLA adjustment on a pension?
Cost of Living Adjustment: an annual increase to the pension payment. A 2% COLA keeps purchasing power closer to pace with moderate inflation. A flat (0% COLA) pension loses real value each year as prices rise. This calculator applies COLA to each year's payment individually. Use a range of inputs rather than a single figure to understand the sensitivity of your outcome to this variable.
Does this include taxes?
No. Both options have different tax implications. Pension payments are typically taxed as ordinary income. A lump sum rollover to an IRA defers taxes; a cash distribution triggers immediate tax and potentially a 10% penalty if under age 59.5. Consult a tax advisor before deciding.
How does a lump sum rollover to an IRA work?
If you roll the lump sum directly into a traditional IRA or 401(k) within 60 days of distribution, no taxes are owed at that time. The money grows tax-deferred and is taxed as ordinary income when withdrawn in retirement. This is the most tax-efficient way to take a lump sum if you choose that route.