Pension Lump Sum or Annuity: How a Woman Executive With $2M Should Decide

Author: Hazel Secco, CFP®, CDFA®

Estimated reading time: 1 minute

Table of contents

• What is the difference between a pension lump sum and an annuity?
• How do you compare a lump sum vs monthly pension offer?
• Should a woman executive choose the joint and survivor annuity?
• Is your pension protected by the PBGC maximum guarantee?
• What are the tax consequences of a pension lump sum or annuity?
• What does the lump sum have to earn to match the annuity?
• What to Do This Week
• Frequently Asked Questions
• Are you on track?

The election packet arrives from HR with a deadline on it. One page shows a lump sum, seven figures if you have spent 20-plus years at the company. The next shows a monthly number with four or five variations beneath it, with names like “Joint and 75% Survivor.” The choice is irrevocable, and your husband, if you have one, has to consent in writing before a notary or a plan representative if you take the lump sum or a single-life annuity. The pension lump sum or annuity decision is the largest irreversible financial choice most executives ever make, and the packet gives you a calculator and about 60 days.

If your investable assets are already north of $1.5 million, the standard advice does not fit you. The big-brand articles are written for a reader whose pension is her main source of retirement income. Yours is one account among several, and the questions that decide it are different: what the plan is really paying you per dollar, what the survivor benefit costs when you are the higher earner, whether your benefit sits above the government guarantee, and what the election does to your tax bracket and Medicare premiums for the next decade.

This post walks through the five tests I run with clients on a pension election, with a worked example for a 60-year-old with a $2 million portfolio.

What is the difference between a pension lump sum and an annuity?

A pension lump sum is a single payment equal to the plan’s calculation of the present value of your lifetime benefit, which you can roll into an IRA. A pension annuity is the plan’s promise to pay you a fixed monthly amount for life, with optional continuation to a spouse. The lump sum transfers investment and longevity risk to you; the annuity keeps both with the plan.

They are the same benefit expressed two ways, and the exchange rate between them is set by a formula the plan does not control. Under Section 417(e) of the Internal Revenue Code, the plan must pay a lump sum at least as large as the one produced by three corporate bond “segment rates” published monthly by the IRS and a unisex mortality table. Higher rates produce a smaller lump sum.

The offer in your packet reflects the rates from the plan’s “lookback month,” which can be any of the five months before its stability period begins. The second and third segment rates, which drive most of the value for a 55- to 62-year-old, rose from 5.28 and 5.63 percent in December 2024 to 5.75 and 6.73 percent in August 2026. For a plan whose lookback month moved from late 2024 to a 2026 month, the same benefit generally converts to a smaller lump sum. If your plan resets its rates each January, the number you see now is locked through December, and the date you commence matters.

How do you compare a lump sum vs monthly pension offer?

The lump sum vs annuity math starts with one division. Divide the annual annuity by the lump sum. That is the plan’s implied payout rate, and it is the single most useful number in the packet. Then compare it to what an insurance company would pay a woman your age for the same lump sum. If the plan’s rate is materially higher than the market rate, the annuity is the better deal on its face. If it is lower, the lump sum is.

In August 2026, a single-life immediate annuity for a 65-year-old woman paid an average of $602 per month per $100,000, about 7.2 percent per year. At 60 the average was $554 per month, about 6.65 percent. Those quotes move with rates, so pull a current one rather than relying on the “6 percent rule” that circulates online. At today’s rates 6 percent is a low bar.

There is a reason the plan’s annuity is often the better deal for you specifically. Under the Supreme Court’s 1983 decision in Arizona Governing Committee v. Norris, employer plans must use unisex tables. A commercial insurer pays a woman less per dollar because she is expected to live longer; your plan is not allowed to. Under the Social Security Administration’s 2023 period life table, a 60-year-old woman has a life expectancy of 24.7 more years against 21.8 for a man. Your plan’s annuity is priced for the blend, and you are on the long side of it.

The worked example: Dana, 60, $2 million, two boxes to check

Dana is a hypothetical composite. She is 60, a vice president at a manufacturing company, single, with $2.0 million in investable assets across a 401(k), a Roth IRA, and a taxable brokerage account. Her pension packet offers a $1,200,000 lump sum or a single-life annuity of $7,000 per month ($84,000 per year), with no cost-of-living adjustment.

Her implied payout rate is $84,000 divided by $1,200,000, or 7.0 percent. A commercial annuity for a 60-year-old woman at the August 2026 average of $554 per $100,000 would pay her $6,648 per month on the same $1.2 million, about $79,800 per year. The plan is paying her roughly $4,200 a year more than the open market would. On the payout test, the annuity wins. That is where most articles stop. Dana has three more tests to run.

Should a woman executive choose the joint and survivor annuity?

A joint and survivor annuity pays a reduced monthly amount for your life and continues a percentage of it, from 50 to 100 percent, to your spouse after you die. Under ERISA Section 205, a married participant’s default form is a qualified joint and survivor annuity with at least a 50 percent continuation. Choosing a single-life annuity or the lump sum requires your spouse’s written consent, witnessed by a notary or plan representative.

When you are the higher earner, run the survivor election backward. The joint and survivor option is insurance on your life for his benefit, and it costs you every month. If Dana were married and the plan offered a joint and 100 percent survivor annuity at $6,100 per month instead of $7,000, she would be giving up $10,800 a year, for life, to guarantee income to a husband who, by the SSA table, is expected to die three years before she does.

That does not make the survivor option wrong. It makes it a purchase to be priced. The questions are whether he would need the income (or whether her other $2 million already covers him), whether term life insurance to age 75 would cost less than $10,800 a year for the same protection, and whether joint and 50 percent buys enough security at a smaller haircut. Husbands often assume the consent signature is a formality. It is the moment to do the math out loud.

For the single woman, the survivor decision disappears and the longevity point sharpens. A 24.7-year life expectancy at 60 is an average. More than half of women her age will outlive it, and an annuity is the only asset in her plan that pays more the longer she lives.

Is your pension protected by the PBGC maximum guarantee?

The Pension Benefit Guaranty Corporation insures private single-employer defined benefit plans, but only up to a cap that depends on the age you start benefits. For plans that fail in 2026, the maximum guaranteed single-life benefit is $7,789.77 per month at age 65 and $5,063.35 per month at age 60. Anything above the cap is not insured.

This is the test that flips executive pensions toward the lump sum. Dana’s $7,000 per month at 60 exceeds the 2026 cap at that age by $1,937 per month. If her former employer’s plan were ever taken over by the PBGC, she would keep about $5,063 and lose the rest, permanently. A benefit nearly 40 percent above the cap carries the credit risk of one company for the next 25 years.

How much weight to give this depends on the sponsor. The plan’s annual funding notice, which the sponsor must send you, shows the funded percentage. Read it before you decide. If the number is under 80 percent, the annuity’s payout advantage has to be large to justify the uninsured slice.

What are the tax consequences of a pension lump sum or annuity?

A lump sum rolled directly into an IRA is not taxed in the year you receive it. A lump sum paid to you in cash is taxed as ordinary income that year, with 20 percent withheld before you see it. An annuity is taxed as ordinary income every year it is paid. For a woman with $2 million already in tax-deferred accounts, the annuity’s permanence is the problem.

For a single filer in 2026, the 24 percent bracket ends at $201,775 of taxable income and the 37 percent bracket begins above $640,600. A $1.2 million lump sum taken as cash would push roughly $540,000 of it into the 37 percent bracket, with most of the rest taxed at 32 and 35 percent. A direct rollover to an IRA avoids that entirely, and from there the money is yours to convert to Roth in the years you choose.

The annuity gives you no such choice. Dana’s $84,000 a year is ordinary income for life, layered on top of Social Security and, from age 75 (the required minimum distribution age for anyone born in 1960 or later), RMDs on her $2 million. It permanently fills the lower brackets that a Roth conversion strategy needs. That is the tradeoff most packets never mention: the annuity’s 7 percent payout is real, and so is the loss of the 15-year window between 60 and 75 in which Dana could have converted a rolled-over lump sum at 22 and 24 percent. Which is worth more depends on her other accounts and has to be modeled. The framework I use is in the Executive Women’s Retirement Tax Playbook.

Then there is Medicare. IRMAA is the income-related monthly adjustment amount, a surcharge on Part B and Part D premiums for anyone whose modified adjusted gross income from two years earlier crosses a threshold. For 2026, a single filer with 2024 MAGI above $109,000 pays $284.10 per month for Part B instead of $202.90, and above $137,000 it is $405.80. A married couple’s thresholds are double at those tiers. Dana’s $84,000 annuity plus Social Security lands her above the $109,000 line, into the $284.10 premium, before she takes a dollar from her IRA. A lump sum she controls can be drawn down, or converted, in a pattern that respects those lines. The mechanics are in the 2026 IRMAA guide.

2026 figures that decide the tax test

Item (tax year 2026)	Single	Married filing jointly
Standard deduction	$16,100	$32,200
Top of 22% bracket (taxable income)	$105,700	$211,400
Top of 24% bracket (taxable income)	$201,775	$403,550
Top of 32% bracket (taxable income)	$256,225	$512,450
37% bracket begins above	$640,600	$768,700
IRMAA: $284.10 Part B premium applies with 2024 MAGI above	$109,000	$218,000
IRMAA: $405.80 Part B premium applies with 2024 MAGI above	$137,000	$274,000
PBGC max single-life guarantee, age 65	$7,789.77 per month	same
PBGC max single-life guarantee, age 60	$5,063.35 per month	same

What does the lump sum have to earn to match the annuity?

The lump sum has to fund the same $84,000 a year for as long as Dana lives, through whatever the market does in her first five years of retirement. Sequence of returns risk is the danger that a bad market early in retirement, combined with withdrawals, permanently shrinks the base. The plan bears that risk with an annuity. Dana bears it with a lump sum.

A $1.2 million rollover paying $84,000 a year is a 7 percent withdrawal rate, well above what a diversified portfolio can sustain for 25 years. But Dana does not need the rollover to do that alone. Her question is whether a $3.2 million total portfolio can fund her spending with room for the Roth conversions and IRMAA management the annuity would have foreclosed. For most households at her level the answer is yes, and the decision turns on the PBGC exposure and the tax flexibility rather than on the payout rate.

Where the annuity wins outright is the household with a smaller pool of other assets, a fully guaranteed benefit under the PBGC cap, and a preference for a paycheck she cannot outlive. MetLife’s 2026 study found one in five retirees who took a lump sum from a defined contribution plan had depleted it, on average within 4.4 years. Those were not women with $2 million portfolios and an advisor, but the finding stands: the lump sum is only better in the hands of someone who will treat it as a pension.

What to Do This Week

Calculate the plan’s payout rate. Divide the annual single-life annuity by the lump sum, then get a live single-life quote for a woman your age from an annuity marketplace and compare.

Find the PBGC cap for your commencement age. If your single-life benefit is above the 2026 monthly maximum at that age, write down the uninsured amount and pull the plan’s most recent annual funding notice.

Confirm the plan’s stability period and lookback month in writing. If rates reset in January and segment rates keep rising, a commencement date inside the current period protects the lump sum figure you have now.

Model the annuity as permanent ordinary income. Add it to projected Social Security and, from 75 for anyone born in 1960 or later, required minimum distributions, and see which 2026 bracket and IRMAA tier it lands you in. Then model the rollover with a Roth conversion schedule between now and RMD age. The difference is the real cost of the guarantee.

If you are married and the higher earner, price the survivor option before anyone signs. Compare the monthly reduction against a term life policy on your life and against the income your other assets would already leave him. His notarized consent should follow the math, not precede it.

Frequently Asked Questions

Is it better to take a lump sum or monthly pension?

It depends on the plan’s payout rate versus a commercial annuity quote for your age and sex, whether the benefit exceeds the PBGC guarantee, your health and family longevity, and your other assets. A woman with a large portfolio and a benefit above the PBGC cap often favors the lump sum for tax flexibility and counterparty risk; a woman with a fully guaranteed benefit and limited other assets often favors the annuity.

Can I roll my pension lump sum into an IRA without paying tax?

Yes. Ask the plan administrator for a direct rollover to an IRA, which is not taxable in the year of transfer. If the plan pays the lump sum to you instead, it must withhold 20 percent for federal tax, even if you roll the money over within 60 days, and you would have to replace the withheld amount from other funds to complete a full rollover.

Does my husband have to agree if I take the lump sum?

If you are married and the plan is covered by ERISA, yes. The default form of benefit is a qualified joint and survivor annuity with at least a 50 percent survivor benefit. Electing a lump sum or a single-life annuity instead requires your spouse’s written consent, witnessed by a notary public or a plan representative.

Are pensions safe if the company goes bankrupt?

Up to the PBGC limit, yes. For plans that fail in 2026, the PBGC guarantees a single-life benefit of up to $7,789.77 per month at age 65 and $5,063.35 per month at age 60. Benefits above those amounts are not insured, which is why large executive pensions carry more sponsor risk than a typical benefit.

Do women get a better deal from a pension annuity than men?

Generally, yes. Employer plans must use unisex mortality tables, so a woman receives the same monthly amount as a man of the same age even though she is expected to live about two and a half years longer at 65. A commercial insurer would pay her less per dollar for that reason. The plan’s annuity is therefore relatively more valuable to a woman, and the plan’s lump sum relatively less.

Are you on track?

If you want to see where you actually stand, I built a free 3-minute Retirement Readiness Assessment that gives you a personalized score and a specific dollar gap estimate based on your numbers. Take the assessment here.

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Hazel Secco, CFP®, CDFA®, is the founder of Align Financial Solutions, a fee-only fiduciary wealth management firm for high-net-worth women with complex financial lives: retirement, equity compensation, tax, and estate as one coordinated plan. Learn how Align approaches retirement planning for women and financial planning for women. Align is based in Hoboken, NJ, but we work with clients across the country virtually.

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Advisory services are offered through Align Financial Solutions LLC, an investment advisor in the State of New Jersey. This article is for educational purposes only and is not personalized investment, tax, or legal advice. Figures are current for tax year 2026 and subject to change. Dana is a hypothetical composite, not a client, and her numbers are illustrative. Consult a qualified professional about your own situation.

Sources

1. Internal Revenue Service, Minimum Present Value Segment Rates (417(e)(3)), monthly table. https://www.irs.gov/retirement-plans/minimum-present-value-segment-rates
2. Congressional Research Service, RS22765, “Lump-Sum Distributions Under the Pension Protection Act,” on segment rates, stability periods, and lookback months. https://www.everycrsreport.com/reports/RS22765.html
3. Internal Revenue Service, Notice 2025-40, mortality tables for 2026 (50 percent male, 50 percent female blend). https://www.irs.gov/pub/irs-drop/n-25-40.pdf
4. Pension Benefit Guaranty Corporation, Maximum Monthly Guarantee Tables, 2026. https://www.pbgc.gov/workers-retirees/learn/guaranteed-benefits/monthly-maximum
5. Social Security Administration, Actuarial Life Table (2023 period life table). https://www.ssa.gov/oact/STATS/table4c6.html
6. Internal Revenue Service, Rollovers of Retirement Plan and IRA Distributions (direct rollover, 20 percent mandatory withholding, 60-day rule). https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions
7. 29 U.S.C. §1055 (ERISA §205), requirement of joint and survivor annuity and spousal consent. https://www.law.cornell.edu/uscode/text/29/1055
8. Internal Revenue Service, Retirement Topics: Qualified Joint and Survivor Annuity. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-qualified-joint-and-survivor-annuity
9. Internal Revenue Service, tax inflation adjustments for tax year 2026 (Rev. Proc. 2025-32). https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2026-including-amendments-from-the-one-big-beautiful-bill
10. Centers for Medicare & Medicaid Services, 2026 Medicare Parts A and B Premiums and Deductibles (IRMAA tiers). https://www.cms.gov/newsroom/fact-sheets/2026-medicare-parts-b-premiums-deductibles
11. Arizona Governing Committee v. Norris, 463 U.S. 1073 (1983). https://supreme.justia.com/cases/federal/us/463/1073/
12. ImmediateAnnuities.com, Immediate Annuity Rates by Age, surveyed August 5, 2026. https://www.immediateannuities.com/annuity-rates/by-age.html
13. MetLife, 2026 Paycheck or Pot of Gold Study. https://www.metlife.com/retirement-and-income-solutions/insights/2026-paycheck-or-pot-of-gold-study/
14. 26 U.S.C. §401(a)(9)(C)(v), required minimum distribution applicable age (73, rising to 75 for individuals born in 1960 or later). https://www.law.cornell.edu/uscode/text/26/401