Should You Take Your Pension as an Annuity?

June 8, 2021

If you are one of the fortunate people that have a pension from an employer, you will have to decide which payout to take at retirement. There are two primary payment options to choose from. You can opt for a one-time, lump sum payment or monthly payments in the form of an annuity. Both options have their pros and cons, but in most cases, we think a lump sum is the better option for retirees. This article will cover why some people choose an annuity payment over a lump sum, why inflation should be a consideration, and why we believe flexibility is the best option when retiring.

When to Choose an Annuity Payment

Pension annuity

If you have other savings and retirement accounts, an annuity payout may be a good idea. While the money you have accumulated in your 401(k) or IRA may last for the rest of your life, an annuity pension can provide guaranteed income to supplement your other sources of retirement income. This means you will need less of your 401(k) or IRA to cover normal expenses. Those accounts can be used to offset unexpected expenses in retirement, they can be left to your heirs as a financial legacy, or they can be given to charity.

For some people, the idea of guaranteed fixed monthly income gives them a feeling of security. It can be nice to know that pension checks will continue to show up every month throughout retirement. This can be especially true for those who are worried that they might lose their lump sum pension due to a severe stock market decline. While this could happen, proper risk management can help your lump sum pension navigate the market ups and downs.

Fixed Income and Inflation

While your pension may provide you with monthly checks, one of the biggest drawbacks with taking it as an annuity is those payments will NOT always have the same purchasing power. It’s true that the checks will always be for the same amount of money over the years. But the value of that amount of money will change. Due to inflation, the purchasing power of your monthly checks will decrease over time. With just 3% inflation, your annuity payment will buy 30% less in year 10 of your retirement. While some annuity types have a cost-of-living feature, most pension annuities pay the same amount each month and do not increase with rising inflation. This is why a fixed annuity payment isn’t always the best choice.

Flexibility is Often the Best Option

Fixed income

Another thing to consider with an annuity pension is that they are not flexible retirement vehicles. Your fixed monthly annuity payments are designed to pay for your basic living expenses and may not be enough to pay for other expenses in retirement. This could make it difficult to use your pension payments for things like making a large purchase or taking a nice trip. While you could save some of your annuity payments for larger expenditures, taking a lump sum pension gives you greater flexibility.

If you take a lump sum pension and invest it wisely, you can use it throughout retirement for whatever you want. You won’t have to worry about living month-to-month on your pension checks. You can use some of it for living expenses, large purchases, travel, home renovations, and you can leave an inheritance for your family.


Taking your pension as an annuity can work for some retirees. If you have other retirement savings and are concerned about market risk, an annuity payout could be right for you. However, the purchasing power of your annuity payments will decrease over time. This might not be an issue right away, but what about 10 or 20 years down the road? In many cases, an annuity payout isn’t flexible enough to meet your changing needs, wants, and goals throughout retirement.

Trinity Wealth Management

If you’re currently faced with the decision between various pension options and would like to know more about the pros and cons of each, we can help. Contact us today to schedule a consultation with our fiduciary financial advisors, including retirement planning specialists.

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