Choosing Between Annuity And Lump Sum


Many employees face a dilemma while selecting between a lump sum payment and monthly annuity while approaching retirement. Employees opting for single life annuity would get a monthly payment for rest of their retired life.

However, after death of an employee his wife would not receive any payment. For joint and survivor annuity, monthly payment is less than single annuity but the surviving spouse continues to receive a fraction of the pension after death of one.

Let us take an example. When a person planning to retire at the age of 62 after working in a company for 35 years he may either take a lump sum of $ 4,75,000 or opt for a single life annuity of $2,875 per month. If the employee opts for 60 per cent joint annuity with his spouse, he and spouse would receive $2,565 when both are alive and surviving spouse would get $1,539.

Neither the annuity nor the lump sum would rise with inflation. Taking lump sum may be a practical choice when an employee has required expertise to generate more income from it than annuity.

Before making a decision between annuity and lump sum and annuity an employee needs to consider some basic issues.

Income from annuity is predictable. Employees retiring healthy at 62 may live for about 20 more years according to data provided by Social Security. Going for the pension option means that you get a secured and guaranteed income every month for making necessary purchases like grocery and medicines.

Spouses of male employees live longer. A married male employee may find it convenient to opt for pension from company. It is probably a better deal for his wife. Female employees may also think twice before opting for lump sum.

If you are not a disciplined investor then it is safe to go for the annuity. Managing a huge amount for more than 15-20 years at an advanced age may not be easy. Employees opting for lump sum ultimately looks at safer avenues like bank fixed deposits to manage a large portion of their fund. Investors going to portfolio managers for managing their fund should be prepared to pay a hefty amount as annual fees.


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