One of the critical question that you must ask yourself when you retire is whether to take a lump sum or annuity plan for your pension. Annuities are financial instruments that make payments to you on a regular basis for the rest of your life, while a lump sum is simply one full payment made now. Whether its the lottery or retirement income, most people choose the lump sum because they believe it offers them the best deal, but this may not be the case!

The biggest factor to take into consideration is your lifespan. Annuities die along with you and your spouse and leave nothing for your heirs, while lump sum payments rolled into an IRA or other retirement vehicle lets your heirs keep the money after you die. Consequently, the general rule is: the longer you live the more valuable an annuity is and visa-versa. Statistics show that a 65-year-old man has a roughly 50-50 chance of living to age 85 and a 25 percent chance of living to 91, while a 65-year-old woman has a 50 percent chance of living to age 88 and a 25% chance of making it to 93.

When evaluating these options, it is important to calculate your retirement needs after social security income and any other income. If you rely on your pension for the majority of your retirement income, then a lump sum may be the best option, as it gives you much needed money upfront. However, if this just accounts for a small portion of your income, the chances are it will pay off to take the annuity over the lump sum as it will typically amount to more in the long run. Finally, another common alternative is to take the lump sum payment and purchase a separate annuity with a higher yield, which gives you the best of both worlds. Combined, these are all very important factors to consider when making decision on your pension payout.