Pension lump-sum payouts 

and your retirement security

A guide for consumers considering 

their retirement payout options from 

a private-sector plan 

Your traditional pension plan is designed to 

provide you with a steady stream of income 

once you retire. That’s why your pension benefits 

are normally paid in the form of lifetime monthly 

payments. 

Increasingly, employers are making available to their employees 

a one-time payment for all or a portion of their pension. This is 

known as a lump-sum payout option. 

If you choose a lump-sum payout instead of monthly payments, 

the responsibility for managing the money shifts from your 

employer to you. In addition, you increase the risk of outliving 

your money, and losing your money due to bad investment 

advice, fraud, or poor stock market performance. 

Learn more at consumerfinance.gov 1

Consumer Financial

Protection Bureau

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2 PENSION LUMP-SUM PAYOUTS AND YOUR RETIREMENT SECURITY

Questions to ask before accepting 

a lump sum

1. Will you be at risk of running out of money?

The monthly payment option offers steady lifetime income, which 

substantially reduces your risk of running out of money later in 

life. This is especially important if either you or your spouse is in 

good health or if either of you has a family history of longevity 

(for example, you have close relatives living into their 80s or 

older). A lump-sum payout, however, might make sense if you are 

in critically poor health, or if you and your spouse already have 

sufficient income to cover your basic living expenses. 

2. Are you taking your pension in a lump sum 

because you’re worried that you may not 

live long enough to get back what you’ve 

earned? 

The monthly pension payment still may be a good choice if you 

are concerned about the retirement security of your spouse or 

other beneficiaries. Most plans allow you to provide monthly 

benefits to your spouse or another beneficiary after your death 

through something called a joint and survivor payout option.

 Where can you find more information about your payout 

options?

Ask your employer for your pension plan administrator contact 

information. Your plan administrator will provide you with more specific 

information about your payout options.
PENSION LUMP-SUM PAYOUTS AND YOUR RETIREMENT SECURITY 3

3. Will you have the necessary investment 

skills? 

When you choose a monthly pension payment, your pension plan 

manages the pension. This means you don’t have to worry about 

your investment skills and how your skills may change as you get 

older. In addition, you don’t have to worry about calculating how 

much you should withdraw regularly to make your money last. A 

monthly pension payment gives you a fixed amount every month 

over your whole life, so you don’t have to worry about changes 

in the stock market. In contrast, a lump-sum payout can give you 

the flexibility of choosing where to invest or save your money, and 

when and how much to withdraw.

4. Is your money protected?

Your pension is typically insured by the Pension Benefit Guaranty 

Corporation (PBGC). In the event your company declares 

bankruptcy or can’t make its payments, this federal agency 

guarantees your payments up to a certain amount. Your pension 

payments are also protected against certain creditor claims. 

When you take a lump-sum payout, you lose these protections.

The protections for your lump-sum money will depend on where 

and how you decide to save or invest it. For example, if you 

choose to invest your lump sum in the stock market, you could 

lose some or all of your money to poor investment performance, 

and could lose certain bankruptcy protections.

 Online resources

To find out more about PBGC’s guarantee limits and whether your plan is 

covered, go to www.pbgc.gov
4 PENSION LUMP-SUM PAYOUTS AND YOUR RETIREMENT SECURITY

5. Should you take a lump sum in order to 

buy a private annuity?

If you want an annuity that gives you regular guaranteed monthly 

income, you’re generally better off staying with the monthly 

payment option within your pension plan. A similar annuity from a 

private company will usually cost you more because it charges to 

cover costs like a commission to the person who sells it to you.

6. Is a combination of payouts possible?

Only a few plans allow people to take a combination of payouts. 

You may decide that the value of your pension is too small to do 

both. Some married couples may choose to take one spouse’s 

pension as a lump-sum payout and the other spouse’s pension as 

a monthly payment.

 What if you have a 401(k) or similar individual retirement 

account?

This guide is for consumers considering a lump-sum payout from a 

traditional pension plan. If you have a 401(k), IRA or similar individual 

retirement savings account, your payout options are typically a one-time 

lump-sum payout or regular withdrawals from your savings. Some 401(k) 

plans offer an option to convert your savings into a lifetime monthly 

pension payment. Ask your employer if this option is available to you.
PENSION LUMP-SUM PAYOUTS AND YOUR RETIREMENT SECURITY 5

Regardless of the payout you choose

Detect and correct errors in your pension 

or lump sum calculation

Know: Mistakes can happen! Many factors determine your 

payment amount:

§ Your age 

§ Your years of work 

§ Your earnings history

§ The terms of your plan

§ Taxes withheld

Act: Take a look at your most recent pension statement. It can 

help you verify that the information used to calculate your payout 

is correct. 

 Online resources

Learn: The ten most common mistakes in calculating a pension from the 

Department of Labor http://go.usa.gov/c8XmV

Help: A pension counselor can answer your questions about your 

pension, and help you solve problems like errors in the calculation of your 

payout. Find free advice from a nonprofit or federally-funded pension 

counselor at www.pensionhelp.org
6 PENSION LUMP-SUM PAYOUTS AND YOUR RETIREMENT SECURITY

If you choose a lump-sum payout

Plan for tax consequences

Know: You will pay taxes on your lump-sum payout. Your lump 

sum money is generally treated as ordinary income for the year 

you receive it (rollovers don’t count; see below). For this reason, 

your employer is required to withhold 20 percent of the payout. 

In addition to paying income tax, you will owe an additional 

10 percent penalty tax, if you take a lump-sum payout before 

age 591⁄2.

Act: If you don’t need all the money immediately, consider rolling 

it over into a qualified retirement account. This will protect your 

money from the 10 percent early withdrawal penalty and defer 

income taxes until you take money out. 

 Online resources

Learn: The rollover process and the different qualified rollover options 

from the IRS http://go.usa.gov/c8XpJ

Help: A tax professional or accountant can help you understand your 

choices and the tax implications. Find a guide offering information about 

free tax information and services at http://go.usa.gov/c9Pyx
PENSION LUMP-SUM PAYOUTS AND YOUR RETIREMENT SECURITY 7

Make your money last

Know: You and your spouse may spend 20 or more years in 

retirement. Over time the value of your lump sum can erode due to:

§ Fees and commissions

§ Market fluctuations

§ Inflation

Act: Start learning about the different savings and investment 

products available, and how they match your personal goals 

and needs. Seek professional help as needed. Never keep large 

amounts of cash at home.

 Online resources

Learn: Tips, tools and other resources for investors: investor.gov

Help: A competent financial planner or adviser can help you manage 

and protect your lump-sum payment. Be wary of advisers who receive a 

commission from selling you particular products or investments. Be sure 

to check their credentials, complaint history, and possible conflicts of 

interest. Find a guide to help you assess the qualifications of a financial 

advisor at http://go.usa.gov/c8XdQ
Protect your money from fraud and scams

Know: Your lump sum may be the target of scammers and 

fraudsters who may:

§ promise high investment returns and low risk 

§ pressure you to act quickly

Act: Take your time. Verify information, ask questions, and seek 

advice from trusted professionals, family and friends; this will help 

you spot a fraud or scam.

 Online resources

Learn: Common scams and frauds that target older consumers:

http://go.usa.gov/c9khP

Help: If you were a victim of fraud or a scam, or suspect that someone 

is trying to defraud you, immediately report it to your local police or 

sheriff’s office. 

If this involves a financial adviser or broker, report it to the Securities 

Exchange Commission or your state securities regulator. You will be 

protecting yourself and others.

Submit a tip or complaint to SEC at: http://go.usa.gov/c8Xvx

Find your state regulator: http://bit.ly/1Snj5EC

Learn more at consumerfinance.gov 8

Consumer Financial

Protection Bureau