Lump Sum vs. Annuity: Which Should You Take?

Choosing between a lump sum and an annuity typically comes up after a lottery win or when collecting a pension. A lump sum offers a one-time payout, giving full control over the money right away, while an annuity distributes payments over time, often for life or a fixed period. The decision affects taxes, investment choices, and long-term financial planning. Each option presents a different trade-off between flexibility and stability.

Do you have questions about managing your retirement savings or a significant windfall? Speak with a financial advisor today.

Lump Sum vs. Annuity

A lump sum payout delivers the full value of your winnings or benefits upfront, often at a reduced amount compared to the total of scheduled annuity payments. This option allows for immediate access to funds, which can be invested, spent or gifted without restrictions. However, it also means taking on the responsibility of managing the money wisely to avoid early depletion.

An annuity, by contrast, pays out over time—monthly, annually or for a set number of years. It provides predictable income and may offer some protection against overspending or poor investment choices. In the context of lottery winnings, annuities often pay out over 20 to 30 years. For pensions, annuity payments may last for life and can include survivor benefits.

Tax treatment also differs. A lump sum may result in a larger immediate tax bill, while annuity payments typically spread the tax liability across years. Personal factors—such as age, health, financial experience and spending habits—can influence which option better aligns with an individual’s goals.

Pros and Cons If You Have a Pension

If your employer offers a traditional defined-benefit pension plan, you may have to make a tough choice when you hit retirement. Should you take a lump sum or choose monthly annuity payments for the rest of your life, and maybe for the life of your spouse’s or beneficiaries’ lifetimes?

Before deciding, let’s look at the pros and cons of both instances:

Pension Plans: Lump Sum vs. Annuity

Payment Type	Pros	Cons
Lump Sum Payment	– Leftover money from a lump sum can be passed on as inheritance – Can invest significant sums of the money sooner – You can pay large debts off quickly	– There’s a risk of depleting your retirement funds if they aren’t carefully managed – You might outlive your savings without a disciplined withdrawal strategy
Annuity	– Provides ongoing payments that last as long as you live – May include the option to continue payments to a spouse or another designated beneficiary after your death	– May limit your ability to access or adjust funds once payments begin – You could pass away before receiving the full value of your retirement benefit – Certain annuity contracts do not continue payments to heirs after your death – The annuity may not be enough to cover high medical costs

Analyzing Your Options

A couple determining whether to choose a lump sum payment vs annuity.

After weighing the pros and cons, you may want to evaluate your own situation. A simple analysis compares the monthly payment amount offered with what you believe you could generate by investing this lump sum at about the same risk level.

There are three factors to consider with this analysis: life expectancy, return on investment and risk of return.

Life Expectancy

Life expectancy figures have shifted in recent years. According to the CDC, the average U.S. life expectancy rose to 78.4 years in 2023—an increase of 0.9 years from 2022—breaking down to 75.8 years for men and 81.1 years for women. This rebound follows a pandemic-driven dip to 77.5 years in 2022 and 76.1 years in 2021.

If you’re healthy, or have a good reason to believe that you or your spouse will live beyond the average life expectancy, monthly payments might be more attractive. If your spouse is significantly younger than you, that also might play a role in your decision. However, unless you choose a survivor benefit or period-certain option, your annuity payments will stop when you die. The survivor benefit allows your heir to receive the annuity payments for their life span after you die. The term certain option offers you payments that decrease a little every month, but that will continue to your heirs in the case that you die.

On the other hand, if you’re in poor health and don’t expect to live beyond the average life expectancy, or you retire later in life, you may get more out of the lump-sum option. You can leave a lump sum for your heirs. And while managing that lump sum, it may be smart to overestimate how long you will live. Outliving your funds due to an underestimated lifespan can pose significant challenges.

Return on Investment

If you already have a sufficient retirement income—whether through Social Security benefits, other existing annuities or other forms of lifetime income—you could take either the annuity payments or a lump sum and invest the money for yourself or your heirs.

Some companies offer a partial annuity, which would allow you to take part of your pension as a lump sum and part as an annuity. If your company doesn’t offer that, you could take the lump sum and purchase your own fixed annuity through a private company. You may be able to purchase an annuity offering higher guaranteed payouts than your pension program. Another option is putting part of the lump sum towards an annuity, and investing or spending the rest of the lump sum however you choose.

It might also be a good idea to take the lump sum and roll it over to an individual retirement account (IRA). A direct rollover to your IRA from your employee plan is not subject to immediate taxation and can preserve the tax-deferred status of this money while allowing it to be invested.

Risk of Return

If you are concerned about the reliability of your retirement income, you might want to take the annuity for the security. If a lot of your retirement income is dependent upon the market rather than guaranteed, security may better support a baseline standard of living.

That said, if you’re choosing the annuity payout for the security, you should check the credit rating of the pension fund or annuity provider. The Pension Benefit Guaranty Corporation (PBGC) is a federal government agency that provides limited protection for some private sector pension participants. If you’re really concerned about losing your pension because of the pension provider’s financial situation or inability to pay out, taking the lump sum may end up being the more secure option.

If your annuity does not have a cost-of-living adjustment, its purchasing power will decrease over time due to inflation. You can invest a lump sum in low-risk stocks, bonds or securities to help your assets keep up with inflation. Then again, doing so involves taking on some risk, and it doesn’t mean your income will last for the rest of your life.

Pros and Cons of Winning the Lottery

While those with a pension plan may have until retirement to decide, lottery winners have to choose quickly if they are taking a lump sum cash option or yearly annuity payments. Let’s look at the pros and cons of both options:

Lottery Winnings: Lump Sum vs. Annuity

Payment Type	Pros	Cons
Lump Sum Payment	– You can use the money right away and however you choose, such as investing it	– The lump sum payment will be less money than the reported jackpot because the total amount is subject to income tax for that year – Funds may be depleted without careful management
Annuity	– Annuity payments typically end up being a larger amount than the lump sum – Some annuity payments may be taxed at a lower rate	– Annuities might give you less financial flexibility in life – You may die before ultimately collecting all of the money you won

Making a Decision

As with a pension plan, it’s important to analyze both payment options before you make a final decision. The two most important factors to account for are your life expectancy and return on investments. Here’s a breakdown of the two most important factors.

1. Life Expectancy

If you choose the annuity option, you will either get equal payments for a period of time, or inflation-adjusted payments for some time. This could offer you more financial security for years to come. You should note that the Federal Reserve tries to keep the inflation rate between 2% and 3%. The Consumer Price Index for All Urban Consumers (CPI-U), which helps measure inflation, rose 2.7% (over the previous 12 months) in June 2025—lower than the federal funds rate of 4.25% to 4.50%.

For example, if you take the annuity and end up spending a year’s worth of money in six months, you get a chance to start over the next year with your next annuity payment and learn from your mistakes. Or if you’re young, you might prefer the extended payouts, since you’re going to live a lot longer and may want to guarantee a comfortable standard of living.

If you’re older, the lump sum of money now will allow you to enjoy it in your sunset years. If you have kids, choosing the extended payout means your heirs receive the remaining installments when you die.

2. Return on Investments

On the other hand, if you’re a good investor, or work with a brokerage or financial advisor that you trust, you can potentially turn that lump sum of money into much more through investments. That amount could end up growing to be more than what you would have taken home using the annuity payout option.

As with the pension money, you could also take the lump sum and purchase your own fixed annuity. There is the possibility of a higher return when you purchase your own annuity than when taking the lottery annuity. You could also try investing in low-volatility, dividend-paying stocks and effectively create your own annuity.

Even if taking the lump sum is theoretically a good decision, it may not align with your financial situation. Many lottery winners end up taking the lump sum and spending all their money in a few years. Taking the annuity option gives you time to figure out how you want to manage your money, and protects you against yourself as well as anyone who might take advantage of you. The trade-off ends up being between security and maximizing your winnings.

Bottom Line

Choosing between a lump sum vs. annuity is an important decision to make regarding your pension.

If you’re receiving a large sum of money from your pension plan or lottery winnings, it’s important to analyze both payout options before choosing the lump sum or annuity. While an annuity may offer more financial security over a longer period of time, you can invest a lump sum, which could offer you more money down the road. Take the time to weigh your options, and choose the one that’s best for your financial situation. It’s worth taking the time to choose the option that aligns best with your financial goals and circumstances.

Tips for Maximizing Your Savings

Deciding between a lump sum or an annuity is a major, consequential financial decision. It’s wisest to give yourself the benefit of a financial advisor’s insights and guidance. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you receive a large sum of money, be sure to budget accordingly. Consider creating a completely new budget and adjusting your long-term financial goals. The extra money will let you pay down debt, which will help you even more in the end.
While it may be intimidating, investing your money is one of the best ways to grow it over time. Start by choosing an online brokerage account or robo-advisor if a financial advisor isn’t right for you.