Pension buyout offers are designed to look generous. A large six-figure number arrives in an envelope, usually with a 90-day window to decide. Most people make this decision with incomplete information.
Here's what you actually need to know.
What the letter tells you
The letter gives you a number. That's it. It doesn't tell you how the number was calculated, whether it's fair relative to what your annuity is worth, or what happens to your healthcare coverage if you take it.
Your employer chose this moment to make the offer for a reason. Usually it's one of two: interest rates moved in a way that reduced their liability on paper, or the company wants to shed pension obligations from its balance sheet before a regulatory deadline. Neither reason is sinister. It's just useful to know that the timing of the offer benefits them, not you.
Five things to check before you respond
1. Run the IRS 417(e) calculation yourself. The buyout offer should be within a few percent of what the formula produces. If it's more than 5-10% below, the company may be using a different lookback month, a different mortality table, or in rare cases, an error worth challenging. Use the calculator here to run the numbers. You need your monthly pension amount, your age, and the plan's segment rates (these should be in the offer letter or the summary plan description).
2. Check what happens to your survivor benefit. If you take the lump sum and invest it, your surviving spouse has access to whatever remains. If you take the annuity with a joint-and-survivor option, the payments continue to your spouse after you die (at 50%, 75%, or 100% depending on what you elect). The lump sum isn't automatically better for couples. Compare the annuity with a survivor benefit against the lump sum with the assumption that your spouse will need income too.
3. Understand the tax hit. The lump sum is taxable in the year you receive it unless you roll it directly to an IRA or 401(k). A $400,000 lump sum taken as cash will push you into the highest federal bracket in that year and trigger roughly $120,000-$150,000 in taxes. The rollover option preserves the full amount and lets you take distributions on your own schedule. Almost everyone should roll over, but confirm with a tax advisor.
4. Find out what happens to your retiree healthcare. Some pension plans are tied to retiree medical coverage. Taking the lump sum may terminate your eligibility. This is rarely mentioned in the offer letter and can be worth more than the pension itself for someone in their early 60s who isn't yet Medicare-eligible.
5. Ask whether you can partial-annuitize. Some plans let you take a portion as a lump sum and keep the rest as an annuity. This isn't common but it's worth asking. It can solve the all-or-nothing problem for people who want both the flexibility of a lump sum and the income security of guaranteed payments.
When the lump sum makes sense
There's a real case for the lump sum. If you're in poor health and don't expect to reach your break-even age, the annuity mathematically loses. If you have no heirs and want to spend aggressively in early retirement, the lump sum funds that. If you're a disciplined investor who can generate 5-6% annually on a diversified portfolio, you may be able to replicate and exceed the annuity's value over time.
But most people underestimate how long they'll live, overestimate their investment discipline, and underestimate the psychological value of a check that arrives every month regardless of what the market does.
When the annuity makes sense
If you're healthy, if your spouse is younger than you, if you have no other guaranteed income sources, or if managing a large investment account sounds stressful, the annuity is usually the right answer. Longevity risk is real. Running out of money at 88 is a worse outcome than dying at 82 with money left over.
The break-even age matters. If yours is 81 and your family history suggests you'll live to 90, the annuity wins by a lot. Run the calculator, find your break-even, and think honestly about where you'll fall relative to it.
Get a fee-only fiduciary involved
This is a one-time, irreversible decision. A fee-only financial advisor charges $300-$500 for a two-hour consultation. Against a $300,000-$600,000 decision, that's not optional. It's the cheapest insurance you'll ever buy. Make sure the advisor is a fiduciary (legally required to act in your interest) and fee-only (not paid by commissions on products they sell you).