Some employers let you pick between a monthly pension check for life and a one-time lump sum. It looks like free money until you see what's inside the choice.
Start with how the lump sum is built. The employer figures out what your future payments are worth today, using an interest rate. When interest rates are higher, the lump sum comes out smaller for the same monthly check. When rates are lower, it comes out larger. So the same pension might be offered as a lump sum of $280,000 in one year and $340,000 in another. The monthly check, say $2,000 starting at 65, doesn't change.
Do some math. A $2,000 check is $24,000 a year. A $320,000 lump sum divided by $24,000 is about 13 years of checks, before you count what the lump sum could earn. If you live to 85, the checks add up to about $480,000. If you live to 95, they add up to $720,000. The monthly check keeps coming no matter how long you live. That means the longer you live, the better the check looks.
With the monthly check, the employer carries the risk of investing the money and the risk that you live a long time. With the lump sum, you carry both. You also give up the survivor choice that comes with a pension, which I covered in single-life pension or joint-and-survivor. A lump sum, on the other hand, can pass to your heirs, and a monthly check usually stops when you or your spouse dies.
Tax mechanics matter a lot. If the plan pays the lump sum directly to you, the plan generally has to withhold 20% for federal tax, and if you're under 59½ you may owe a 10% early withdrawal penalty on top. A direct rollover into an IRA avoids the withholding and the penalty, and you pay tax as you take money out later. The required minimum distribution rules then start in your 70s.
Questions to put to the plan: What interest rate set the lump sum, and when? Is the pension insured, and up to what amount? Does the monthly check have a cost-of-living raise? What happens to the checks if I die first?
For many households, a guaranteed check covers the basic bills, and savings pay for everything else. How much to cover that way is a question I looked at in how much of your retirement income should be guaranteed. I'm a licensed insurance broker, not a CPA or retirement plan advisor, so get the tax figures from one before the election deadline.