Identification

• When you retire, your employer will give you the option to take monthly payments. All of these options involve allowing the pension administrator to manage your pension and make payments to you monthly. However, a lump sum pension payment allows you to take all of the money in your pension and manage the money yourself.
  
  You must fill out a distribution form and your spouse must sign a disclosure acknowledging that she or he will not receive any benefits from the pension after you die.
  
  

Benefit

• The benefit of taking a lump sum of money at retirement is that you have full control over how your pension money is used. This money may be taken as a full distribution or rolled over into an IRA. Full distributions are taxed at ordinary income tax rates. IRAs are not taxed until you withdraw money from them. Another option is to transfer the money into a Roth IRA. Roth IRAs are special IRAs that only accept non-deductible contributions. You have to pay income tax on the amount you transfer into the Roth, but future withdrawals will be tax-free.
  
  In all cases, you get the invest the money as you see fit instead of having the pension invest your money into annuity contracts and pay you a set, fixed, monthly payment.
  
  

Disadvantage

• The disadvantage is that you bear all the responsibility for your retirement. If you lose this money, then you and your spouse won't have any money for retirement. You cannot go back to the pension plan administrator and receive any benefits, since you've taken them all. Losing your pension benefits in the stock market or some other investment may mean that you can't live as you wanted to during retirement.
  
  

Expert Insight

• Even with the risks associated with taking a lump sum distribution, the lump sum puts you in full control of your retirement benefits. You can opt to put a part of your money into an annuity policy yourself so that you get some of the same benefits that you would get from your pension. Meanwhile, you can keep some of the money invested so that you have a lump sum of money if you ever need it. If invested conservatively, the lump sum of money can then be passed on to your spouse after you die.