Pension Lump Sum vs Annuity Calculator
Compare a pension lump sum with lifetime or fixed-term payments
A pension election is hard because the two options solve different problems. A lump sum gives control, liquidity, and investment flexibility. An annuity gives a scheduled income stream and shifts some longevity and market risk back to the plan. This calculator compares them on one clear metric: the present value of the annuity payments versus the lump sum offered today.
The result is not a complete recommendation. Taxes, survivor benefits, plan guarantees, health, life expectancy, inflation, debt, spouse consent, and rollover rules can matter more than the raw present-value comparison. Use the calculator to understand the financial tradeoff, then review the plan documents and qualified advice before making an irrevocable election.
Formula
The calculator treats the annuity as an annual payment that may grow by a cost-of-living adjustment (COLA). If the first payment is PMT, the discount rate is r, the COLA is g, and payments last n years, the present value is:
Plain-text formula for constant annual annuity: PV = payment * (1 - (1 + r)^(-n)) / r.
Plain-text formula with growth: PV = payment * (1 - ((1 + g) / (1 + r))^n) / (r - g). If r == g, use PV = payment * n / (1 + r).
When the discount rate and COLA are equal, the formula simplifies to PMT x n / (1 + r). For a level annuity with no COLA, it becomes the standard present value of an ordinary annuity.
How to choose inputs
- Lump sum offer: the gross one-time amount shown in your pension election materials.
- Annual annuity payment: the expected first-year annual payment. If the offer is monthly, multiply by 12.
- Years of payments: use a planning horizon that matches the offer. For a lifetime annuity, this is a longevity assumption, not a guarantee.
- Discount rate: the annual return you would need or reasonably expect on the lump sum after investment risk, fees, and taxes.
- COLA: the annual payment increase, if the plan provides one. Enter 0 if payments are fixed.
Worked example
Suppose the plan offers a $240,000 lump sum or $18,000 per year for 20 years, with a 3% discount rate and no COLA. The annuity present value is about $267,800, which is higher than the lump sum by about $27,800 under those assumptions.
If you raise the discount rate, the annuity's present value falls because future payments are worth less today. If you add a COLA, the annuity's value rises because later payments grow.
What the result means
A positive difference means the annuity has the higher present value. A negative difference means the lump sum is larger than the discounted stream of payments. The margin matters: a small gap can be overwhelmed by taxes, investment fees, survivor protection, or personal risk preferences, while a large gap deserves closer review.
Limitations
This simplified comparison excludes taxes, survivor benefits, plan guarantees, PBGC rules, longevity risk, inflation indexing unless entered, investment fees, and personal risk tolerance.