Printable checklist for your desk
Print this checklist and use it to compare the two offers with your spouse and your advisors.
Download the PDF (large print)The short version. A pension offer is a choice between a one-time sum and income for life. The lump sum depends on interest rates the day it is calculated, while the monthly payment depends on your plan's formula and the survivor option you pick. Both are hard to reverse.
How a lump sum is figured
Plans must use IRS-prescribed interest rates and a mortality table to convert your monthly benefit into a single payment. When rates are higher, the same pension is worth a smaller lump sum. The 2026 table is in IRS Notice 2025-40. The plan decides which month's rate applies. [1, 2]
The tax rules for a lump sum
- Rolled over directly. A direct rollover to an IRA is not taxed now, with no withholding. [3]
- Paid to you. The plan must withhold 20% for tax. If you want to roll over the whole amount, you must replace the withheld 20% from other money within 60 days. Any part you keep is taxable income. [3]
- Under 59½. The taxable part not rolled over may also face a 10% additional tax unless an exception applies. A separation from service in or after the year you turn 55 is one exception for an employer plan. [3, 4]
- Medicare premiums. A taxable lump sum raises your income in the year you take it, which can raise Medicare premiums two years later. See our Medicare guide. [5]
Protections that come with monthly payments
- Spousal protection. For a married participant, the default is a joint-and-survivor annuity, with the survivor receiving 50% to 100% of the amount. Giving it up requires your spouse's written consent, witnessed by a notary or plan representative. [6]
- Joint payments are smaller. A survivor option pays a lower monthly amount because it covers two lives. [6]
- Federal insurance. Most private pensions are insured by the Pension Benefit Guaranty Corporation (PBGC), up to a limit. For plans ending in 2026, the maximum monthly guarantee for a 65-year-old is $7,789.77 for a single-life payout and $7,010.79 for a joint-and-50% survivor payout. The limit is lower at younger ages. PBGC does not provide cost-of-living increases. [7]
Compare the two side by side
| Lump sum | Monthly payments | |
|---|---|---|
| Income | You decide how to use it. | Predictable income, paid for life. |
| Inflation | Depends on how you invest it. | Usually fixed. Check whether your plan adjusts. |
| Taxes | Can be deferred with a direct rollover. | Taxed as received. |
| Survivors | Passes to your beneficiaries. | Depends on the survivor option you choose. |
| Risk | You carry market and longevity risk. | The plan carries it, subject to PBGC limits. |
| Reversibility | Cannot be undone. | Usually cannot be undone. |
Questions to ask the plan administrator in writing
- What is my monthly benefit at each possible start age, and what is the lump sum?
- Which interest rate and month does the plan use for the lump sum?
- What survivor options are available, and what does each pay?
- Does the benefit increase for inflation after I start?
- How well funded is the plan, and is it covered by the PBGC?
- What is the deadline to decide?
Frequently asked questions
How is a pension lump sum calculated?
Plans use IRS-prescribed interest rates and a mortality table. When rates are higher, the same pension is worth a smaller lump sum.
What happens if the lump sum is paid to me?
The plan must withhold 20% for tax. To roll over the whole amount you must replace the withheld 20% from other money within 60 days.
How does a lump sum affect Medicare premiums?
A taxable lump sum raises your income in the year you receive it, which can affect income-related Medicare amounts two years later.
Sources and review notes
General education, not individualized investment, tax, or legal advice. Discuss tax decisions with your tax professional, and recheck annual limits before using this page for another tax year.