If you're leaving an employer with a defined-benefit pension, you'll usually get a one-time choice: take the commuted value (a lump sum you can roll into a LIRA / locked-in IRA) or take the lifetime monthly annuity. The decision is irrevocable, often worth six or seven figures, and rarely revisited because most people only face it once.
What you're actually being offered
The lump sum is the present value of your future pension stream, calculated by the plan's actuary using a discount rate set by the regulator. The monthly annuity is exactly what it sounds like: a fixed (sometimes inflation-indexed) payment for as long as you live, often with a survivor portion for your spouse.
The plan isn't doing you a favour either way — both options are calculated to be roughly fair to the average member of your demographic. The question is whether you're average.
Five questions that shift the answer
1. How long do you expect to live?
Annuities are insurance against living longer than expected. If your family history (and your own health) points to a long life, the monthly payment almost always wins on cumulative dollars. If you have a serious diagnosis or a family history of early death, the lump sum lets you control the asset — and pass it on if you don't need it.
2. Is the annuity inflation-indexed?
A flat $2,300/month sounds like a lot today. After 20 years of 2% inflation, it has roughly two-thirds the purchasing power. Many corporate pensions are not fully indexed (or not indexed at all). Public-sector pensions usually are. Check the indexing formula — partial indexing (CPI capped at 2%) is common and is closer to no indexing than to full.
3. What does the survivor portion look like?
The default is often a 60% survivor benefit — your spouse gets 60% of your payment after you die. You can usually elect higher (75% or 100%) in exchange for a smaller monthly payment to you. If your spouse outlives you and depends on the pension, the higher election is rarely a bad deal.
With the lump sum, the survivor question is moot — whatever's left in the LIRA / IRA passes to your beneficiaries.
4. How healthy is the plan?
Annuities are only as good as the entity guaranteeing them. Public-sector and large corporate pensions are usually well-funded; smaller corporate plans can be underfunded. Even with regulator backstops (Pension Benefits Guarantee Fund in Ontario, PBGC in the US), large pensions can be reduced if the employer fails. The lump sum removes that counterparty risk.
5. How disciplined are you with money?
A $500,000 cheque looks like infinite money to many people. Spent down at 7% annually (well above sustainable rates), it's gone in 25 years. Spent at the genuinely-safe 4%, it pays $20K/year — and you have to manage the portfolio for the rest of your life. The annuity removes both temptation and management overhead.
The math nobody likes to do
Compute the “internal rate of return” the annuity offers vs. the lump sum. If the lump sum is $400,000 and the annuity is $2,300/month ($27,600/year) until age 90 (assuming you're 60 today), that's a 30-year stream. The implicit rate of return on the lump sum that would produce that same income is roughly 5.5%–6%. That's a tax-deferred, government-or-employer backed 5.5–6% with zero portfolio management — quite hard to beat with a bond ladder.
Most online calculators do this calc honestly. The catch: they all assume you live to a particular age. Run it at the 25th, 50th, and 75th percentile of your demographic's life expectancy and notice how much the answer moves.
The hybrid play
If your plan allows it, take a partial commutation: lump-sum part, annuity part. You get the longevity insurance on the essentials and the optionality on the rest. Many plans don't offer this, but it's worth asking.
Bottom line
- Take the annuity if you're healthy, the plan is solid, the indexing is real, and you'd rather not manage money for 30 years.
- Take the lump sum if you have other guaranteed income, your health is shaky, you have heirs you want to pass it to, or the plan has known funding issues.
- Get a second opinion from a fee-only advisor before signing — the decision is permanent, and most of the work is figuring out which assumptions to trust.