Pension Lump Sum vs Annuity Calculator
Compare the long-term financial value of taking a pension as a one-time lump sum versus a guaranteed monthly annuity. Use this at retirement when your employer presents both options and you need a data-driven choice.
Last updated: September 2026
Formula below · 3 sources (pbgc.gov, dol.gov, Wikipedia) · Updated Sep 2026
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About this calculator
To compare a lump sum with a stream of pension payments, both must be valued at the same point in time. The calculator discounts the annuity to today's value at your expected investment return r, which is the return you would need to earn on the lump sum to reproduce the payments: PV = annualPayment × (1 − ((1 + g) / (1 + r))^n) / (r − g), where annualPayment = monthlyPayment × 12, n = years of payments, and g = the pension's annual cost-of-living increase (0 for a fixed pension, as most private pensions are). Result = lumpSum − PV. A positive result means the lump sum is worth more at your assumed return; a negative result favors the annuity. Payments are treated as annual, at the end of each year. Inflation does not need its own input: a fixed pension and an invested lump sum are both nominal, so inflation erodes both the same way; it only matters if the pension has a COLA. Longevity and the assumed return drive the answer: a longer life or a lower return favors the annuity. The annuity also removes investment and longevity risk, which this present-value comparison does not price. (This replaces an earlier comparison that set the lump sum's investment growth against the undiscounted sum of payments inflated by the inflation rate, which was not a like-for-like comparison.)
How to use
Suppose your pension offers a $200,000 lump sum or a fixed $1,200/month annuity (no COLA). You expect a 6% investment return and payments for 20 years. Step 1 — Annual payment: $14,400. Step 2 — Present value at 6%: $14,400 × (1 − 1.06^−20) / 0.06 = $14,400 × 11.4699 = $165,167. Step 3 — Lump sum advantage: $200,000 − $165,167 = $34,833, so the lump sum is worth more at a 6% return. At a 3% return the annuity's value rises to $214,236 and the annuity wins.
Frequently asked questions
When does taking a pension lump sum make more financial sense than an annuity?
The lump sum generally wins when you can consistently earn an investment return higher than the pension's implied rate of return (the rate at which the annuity stream equals the lump sum). It also favors those in poor health with shorter life expectancies, those with strong investment discipline, and those who want to leave assets to heirs. However, the lump sum transfers all longevity and investment risk to you, which is a significant trade-off that purely financial comparisons don't fully capture.
What is a breakeven life expectancy for the pension lump sum vs annuity decision?
The breakeven is the number of years of payments at which the annuity's present value equals the lump sum. Using the default figures ($400,000 lump sum, $2,500/month, 6% return), the annuity needs to pay for about 28 years to be worth the lump sum; at a 4% return it needs about 20 years. Equivalently, you can find the implied interest rate at which the two are equal: if you cannot reliably earn more than that rate, the annuity is the better deal. Live longer than the breakeven and the annuity wins.
How does inflation affect the choice between a pension annuity and a lump sum?
Most traditional pension annuities pay a fixed nominal monthly amount, so inflation steadily erodes their purchasing power: at 3% inflation, a $1,200/month payment loses about 45% of its real value over 20 years. A lump sum invested at the same return is eroded by inflation in exactly the same way, which is why the comparison uses nominal values on both sides. If your pension has a cost-of-living adjustment (COLA), enter it in the COLA field; it raises the annuity's present value considerably.