If you are approaching retirement you will be facing some pretty hefty decisions. One of these very important decisions to make is your lump sum annuity decision. Will you be taking your entire pension up front, or get monthly installments of it for the rest of your life? There may be advantages and risks to both choices.

Taking the entire amount may be tempting, but how will you manage it? If you do not think you can handle it on your own, you will have to hire someone to manage it for you. This will cost money and does not guarantee returns.

If you just do not want to worry about money and receive a set amount to cover the basics, monthly installments of your pension can help you do this. When you take the entire amount up front you will have to think about investments and money management. You also risk losing it if not invested correctly.

The monthly annuity option guarantees a set amount of money for life. What this payment will not take into consideration is the inflation rate. Even though the amount you will receive now is enough to cover your expenses and then some, it will lose its buying power in a few years. Even if inflation rises slightly, you can buy today with your annuity will be less in the years to come.

If deciding on taking the lump sum and know that you can take care of the amount you receive, it can have its benefits. Since annuity payments will not rise with inflation, this means that the same amount you receive now will not have the same purchasing power in a few years. This means that the actual value in terms of buying power of your money will decrease over the course of time.

Also, when taking a fixed-rate annuity you are locking in the current base interest rate on your monthly payment. In the current economic climate interest rates are very low, so you will be stuck with a low interest rate for the life of your payments. With a lump sum you can consider short-term investment until interest rates increase. In this scenario you will have some other sort of income to cover your personal expenses.

Annuity payments are taxable. If you invest your pension lump payment you can roll it over into an IRA that is generally not taxed. It is taxed when you make a withdrawal, and the taxes are usually less than with an annuity option. Thus, these are only some of the many factors to consider when making the lump sum annuity decision.

Enrique Castillano also writes about Retirement Planning and Annuities including Lump Sum Annuity and How much is my annuity worth?