Hi there! The decision to take a lump sum versus a pension is a difficult one, with a number of pros and cons either way. Many find that it's nice to get their hands on the lump sum all at once, while others prefer the security of the monthly pension. Here are some pros and cons:
Benefits of Lump Sum
Investment Independence: By taking the lump sum, you have the independence to make your own investment decisions or a hire a financial planner to guide you. Good investment results could provide you with more funds to enjoy than the monthly pension.
Leaving an inheritance: Most pensions offer the option to continue payments to your spouse upon your death, however, there is generally nothing left for kids or other beneficiaries. A lump sum provides the opportunity to leave something to your heirs.
Tax flexibility: A monthly pension is generally taxes when received, as ordinary income. Assuming you roll a lump sum into an IRA, distributions are also taxed as ordinary income. However, by making smart decisions around your IRA distributions, you can maximize your after tax withdrawals. For example, you might take larger distributions in years in which you are in a low tax bracket.
Distribution flexibility: With a lump sum, you can decide to take a larger or smaller distribution depending on your situation. A larger distribution might be necessary for a large one time expense (major travel, medical expense, home remodel). A smaller distribution might be due to reduced expenses or cash flow from other sources.
Benefits of Monthly Pension
No investment risk: Poor or inappropriate investment decisions with the lump sum may result in low returns, hampering your standard of living. The monthly pension assumes the risk for you.
Psychological peace of mind: Not being able to see your lump sum rise and fall with the market may give you added peace of mind. It will also prevent emotional mistakes that are often made by investors, such as selling low after a crash.