financial advise lump sum vs annuity

Lump Sum vs Annuity Pension: Which Is Best?

March 15, 2016


Every few weeks someone comes to us with questions about an annuity.  We routinely evaluate annuities and we are often baffled at the amount of complexity built into this form of insurance product.  Obviously, every individual or family is different. You may already have annuities in addition to your annuity from the social security administration. You may have specific tax issues or concerns.
One of the most common questions we hear is the classic “Should I take a lump sum payment or monthly annuity?” If you’re nearing retirement and will soon need to review your investments, you may well be asking yourself the same question. A lump sum gives you a larger portion of money up front, and you can do what you please with it. An annuity offers you a steady income over an extended period of time.
At HSC Wealth Advisors we have come up with a number of the pros and cons concerning the decision.

Why Do Some People Take the Lump Sum Rather Than Annuity Payments?

Some people choose the lump sum because they like having money upfront. There are several additional advantages of taking the lump sum vs. the annuity:
1)      You will already be receiving an inflation-adjusted annuity at retirement, the U.S. Government annuity known as Social Security.

2)      Properly managed, the lump sum can grow and keep up with inflation. In fact, you can make strategic choices in how to invest the lump sum, so it earns you more.

3)      You can continue the tax-deferral into the future.

4)      There is opportunity for Roth IRA conversions. This option allows you to convert portions of your lump sum money to a Roth IRA, if your tax situation permits, where the investment can grow tax-free.

5)      You have tax-efficient withdrawal opportunities because you can adjust the timing of withdrawals.

6)      It may be possible in the future to donate the amount to a charity or leave it to children or grandchildren. With a larger sum, you may have more options.

7)      You could grow the money and purchase an annuity in the future when interest rates may be better. If the market currently has low interest rates, it may be better to wait. It’s easier to move from a lump sum amount to an annuity than to cash in an annuity and get a lump sum.

The Disadvantages of Taking the Lump Sum

When you’re wondering whether to take the annuity or lump sum, the lump sum may offer you flexibility and open some investment options. However, taking the lump sum has some big drawbacks, too:
1)      With poor market performance, the sum may not grow as expected. In other words, you may take the lump sum, invest it, and find you would have had a more predictable income stream with the annuity.

2)      You are responsible for managing the money. Are you disciplined and methodical? Do you understand how investments and finances work? If you struggle with savings and money management or don’t know how to handle larger sums, it may be easier to stick to an annuity or at least hire financial professionals to help you manage the lump sum.

3)      You run the risk of using it up by withdrawing too much due to easy access.

4)      You may live longer than your average life span and have to make the money last longer.

Annuity vs Lump Sum Payout: The Bottom Line

The bottom line is that it is your money and your investment. It is ultimately up to you whether you decide to pursue annuities or not.
If you do decide to take a lump sum, keep in mind there are disadvantages. Make sure you have financial advice as well as the discipline to prevent over-spending. If you’d like some financial advice and need assistance with your investments, or if you have questions about annuities, contact HSC Wealth Advisors for a consultation.



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