Should I Take a Lump Sum or an Annuity Payment?
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I Could Pay Off a Lot of My Debts Right Now
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If you've got a substantial amount of debt to settle, a lump sum can get you debt-free and offer you a fresh start. You may even have some money left over. Likewise, if you're going to make a large purchase, such as a car or a house, a lump sum payment may save you money in the long run.
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Lump-Sum Payments Pay Less, Don't They?
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Most lump-sum payments only pay a fraction of what the annuity is worth, as companies that buy annuities and pay out a lump sum have to make a profit somehow. The part the company takes can range from 30 percent of the equivalent cash value to 50 percent or more. For example, state lotteries typically pay out at 50 to 55 percent, depending on the state. In addition, unlike an annuity in which the income is spread out over several years of taxes, with a lump sum all of the money would be applied to one year's taxes and would be payable immediately---so you would get even less than you expect.
Bottom Line
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An annuity payment is almost always preferable. The only exception is if you plan to use the lump sum to pay down a high interest rate debt or to avoid paying long term interest on something of greater value. If neither of those conditions apply, stick with an annuity and try to find ways to reduce your expenses first.
References
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