Pension Annuity or Lump Sum – Which Is Better?

pension annuity and lump sum

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With increased prices of products and cost of living, an efficient pension plan has become a necessity to sort your retired life financially. Therefore, you must build a sound pension plan based on your financial goals and requirements.

Pension plans generally come in two forms - regular or lump sum payments. Each can cater to your needs differently. Here we will discuss the difference between a pension annuity and a lump sum to give you an insight into their benefits and limitations.

Differences Between Pension Annuity and Lump Sum

At the time of retirement, your employer can either offer you a regular pay-out option (pension annuity) or offer a large sum of one-time payments (lump sum).

Therefore, you must understand the primary difference between the two to assess your financial plans accordingly. The table below illustrates the difference between retirement pension annuity and lump sum fund based on their features:

Features Pension Annuity Lump Sum
Pay-out Types •  Single life payment

•  Single life with term certain

•  50% joint and survivor

•  100% joint and survivor		 One-time payment of a lump sum amount.
Validity Guaranteed payment till the end of your life (also for beneficiaries in case of joint pension plans). The entire sum is paid out at one go.
Stability Pension annuity plans are more stable as they are monthly payments, and there is no risk of running out of money. Lump sum plans are less stable as the amount is paid once, and you may run out of resources afterwards.
Nominees Your beneficiaries can benefit from a steady paycheck every month if they live long after you. In case of any unfortunate event, your dependents will receive the remaining amount as a whole.
Usability You can use the money to take care of your necessary expenses and to pay off smaller debts. You can use the money to clear off large debts and outstanding loans or take care of extensive responsibilities such as children's education, marriage, etc.

Pension Annuity vs Lump Sum - Which is the better choice?

Both pension annuity and lump sum payment plans can be valuable depending on your financial portfolio and post-retirement goals. Therefore, before determining which plan to choose, you must learn about the benefits they offer and their limitations.

1. Pension Annuity

Pension annuity plans offer a steady flow of income post-retirement after you have made a substantial amount of investment. In addition, there are multiple payment options to choose from, providing financial support for both you and your beneficiary.

Moreover, annuity plans also offer tax benefits under Section 80CCC of the Income Tax Act of 1961.

Why should you opt for Pension Annuity?

Regular flow of income comes with a number of benefits, such as:

  • No risk of running out of resources.

  • Less necessity for disciplined financial management.

  • You do not have to worry about your dependents if you opt for a joint and survivor plan.

  • You can also opt for a return of the premiums paid to your nominee in case of an unfortunate event.

The benefits mentioned above indicate that pension annuity plans can be helpful if you prefer a guaranteed monthly income after retirement. In addition, it can be useful if you are not in need of immediate funding or have a significant financial responsibility.

However, you must also keep account of the following limitations:

  • A pension annuity gives you less control over your finances.

  • You have to weigh the monthly payment amount against the market costs and the effect of inflation, thereby making a cost-of-living adjustment.

  • In case of an unexpected demise, you will not receive the total amount you are owed.

2. Lump Sum

A lump sum pension plan includes a one-time payment that you receive at retirement. It is a significant sum of money that you can utilise to fulfil your instant financial needs, such as children's education, marriage, opening a new business, or investing in your hobbies and dreams.

Why should you opt for Lump Sum Payment?

Here are some of the advantages that come with lump sum payments:

  • It helps you offload any pending financial debts or responsibilities.

  • It gives you more control over your resources, and you can independently plan your financial portfolio.

  • Your nominees can get the remaining amount in case of an unfortunate event.

  • You can invest the amount in a better-performing fund to get higher returns.

  • The remaining money can be passed on as an inheritance to your loved ones.

However, this option also comes with some limitations, such as:

  • The money can be exhausted if you fail to manage your expenses or plan your budget adequately.

  • You need to be cautious about where you invest the money and also carefully manage your assets. 

  • The amount can be subject to market risks when invested or fail to keep up with inflation.

Keeping the points mentioned earlier into account, you can find that a lump sum payment can be a useful plan that gives you more freedom to manage your finances. For example, you can consider this option if your financial needs change after retirement or have to meet immediate expenses. Moreover, it lets you have access to a larger sum of money in case of emergencies and also plan out a financial strategy on your own terms. 

This article illustrates the difference between pension annuity and lump sum and also mentions the conditions under which they can be suited to your specific needs. With a steady income or substantial savings post-retirement, you can devote your time to your loved ones, hobbies and activities without depending on others. 

While a traditional pension annuity plan secures you a regular source of income after retirement, a lump sum payment gives you more control over your assets and fulfils your post-retirement dreams.

FAQs about Pension Annuity and Lump Sum

What factors should I consider before choosing a pension payment plan?

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Before choosing any plan, you must consider factors such as your life expectancy, investment risk, stability, your budget, inflation, and convenience. Also, note lump sum can be a better option if you have a high-risk appetite or immediate monetary needs. However, it may not be useful if your financial management skills are poor and you prefer convenience over quantity.

How does life expectancy factor into a pension payment plan?

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Life expectancy is one of the most crucial factors to consider when deciding a pension plan. For instance, if you are in good health with no critical illnesses, a regular pay-out option may seem more favourable, which you can enjoy for a long time.

On the other hand, if you or your spouse have a poor health condition and do not expect to live beyond the average duration, a lump sum amount may be more suitable to pay off medical expenses or pass on as an inheritance.

When should I choose regular pay-outs instead of lump sum?

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Your pension payment plans depend on your budget planning and return expectations. Therefore, a regular pay-out option can be more favourable if you prefer a convenient option of steady income despite market conditions.

Moreover, if you have other post-retirement incomes, this can work as a steady bonus to cater to your desires other than regular expenses.

Disclaimer

  • This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
  • All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
  • Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.