Lump sum vs. annuity: which is right for me?

1 min readLast updated December 5, 2023by Rachel Carey

This article delves into the pros, cons, differences, and other aspects of pension, lottery, and additional lump sum vs. annuity payouts.


  • A lump sum pays out the full amount of money owed in one single payment. 

  • An annuity pays the amount in smaller payments over a period of time. 

  • Lump sums and annuities have pros and cons unique to their payout structure. 

  • Both payment types have different tax implications depending on the investment type. 

  • A financial advisor can help you find the best retirement options for you.  

What is a lump sum? 

If you choose a lump sum, you will receive the full amount of money in one single payment instead of in regular installments.  

This type of payment is usually associated with retirement investments such as 401(k) accounts and pension plans. It’s also an option for lottery winners who don’t want to receive their payouts in a series of yearly payouts. 

For example, let’s say you won a $50 million lottery jackpot. You can choose to receive your winnings in a lump sum payment so that the full amount is paid into your bank account at one time. 

What is annuity? 

This payment option is a contract between you and a pension plan, lottery, or other provider in which you receive your money in regular disbursements.  

Unlike a lump sum, an annuity provides you with a steady income stream. Depending on the source of the annuity, such as whether it’s your 401(k) plan, you can tailor it to suit your preferences. You may have the option of deciding when to start receiving payments and to choose the duration of the payments, such as for 25 years or the rest of your life.  

For example, let’s say you win an $85 million lottery jackpot. You can choose to receive your winnings in annual payments of $3.4 million each over a period of 25 years. 

Lump sum vs. annuity: what’s the difference? 

Examining lump sum vs annuity reveals a few key differences. Familiarize yourself with them so that you can make an informed choice. 


Lump sumAnnuity
Structure Payout of the entire amount happens at once. The amount is paid out in smaller disbursements over time.
Investor: Good for people who want to invest in other financial instruments for higher returns. Good for people who struggle to manage money.
Cashflow Cash flow is affected by tax. Cash flow usually adds up to an amount larger than the lump sum.
Tax A lump sum can put you in a higher tax bracket. Deferred annuities let you delay paying taxes on earnings until you start making withdrawals.
Examples Fixed deposits and provident funds. Lottery jackpot annuity payout option.

What are the pros and cons of receiving a lump sum? 

If you are seriously considering annuity vs. lump sum, you should be aware that there are pros and cons to receiving a lump sum payment. 



  • You can invest large amounts of money sooner. 

  • You can pay off large debts in a short time. 


  • You can use the full amount of money immediately. 



  • You could run out of money if you don’t manage it properly. 


  • The lump sum payment is subject to income tax for that year. 

  • You could run out of money if not managed properly. 

What are the pros and cons of receiving an annuity? 

It’s also important to know and understand the pros and cons of receiving an annuity, whether you’re thinking about your pension or a lottery annuity vs a lump sum. 



  • You will receive income for the rest of your life. 

  • You may be able to pass on this income as an inheritance. 


  • Annuity payments often add up to more than the lump sum. 



  • Annuities offer less financial flexibility. 

  • The annuity might need to be bigger to cover your bills. 


  • You might die before collecting all your winnings. 

Can you combine a lump sum and an annuity? 

Yes, you can create a customized financial plan that combines lump sum and annuity payments to meet your specific financial needs and goals. You don’t necessarily need to see a clear winner emerge from the annuity vs. lumpsum battle. 

For example, you could use some lump sum payment to buy an immediate fixed annuity with the goal of covering as many of your fixed expenses as possible. You can use Social Security to help with this. Following a route like this gives you a reliable income baseline as well as flexibility in managing the rest of your money. 

How do I choose between an annuity and a lump sum?  

Carefully consider the pros and cons of an annuity vs lump-sum, and think about your lifestyle, circumstances, approach to financial management, and risk tolerance.  

Annuities are typically more suitable for individuals who need a steady stream of income, such as in retirement or when financial discipline is a concern. Annuities can provide long-term financial security and a consistent income flow. 

Choosing a life annuity with specific options like a joint and survivor annuity can ensure that payments continue for both your and your beneficiary's lifetime.  

Can I change my choice between a lump sum and an annuity after making a decision? 

The ability to change your choice may depend on the specific terms of the payment arrangement, so it's important to carefully consider your options before deciding. In most cases, you cannot change your mind after choosing to receive a lump sum or an annuity. 

That said, it may be possible to get out of an annuity in various ways. One way is to cash out your annuity and receive a lump sum from the annuity, although this can come with a steep surrender fee and tax implications. It’s best to seek the guidance of a trustworthy financial advisor. 

Will I pay taxes on my lump sum and annuity payments? 

Taxes may vary, but lump sum payments often have immediate tax consequences, while annuity payments may be taxed as income over time. 

For example, let’s say you won a $10 million lottery jackpot. If you took the lump-sum payment, the entire amount would be subject to income tax that year – and your win would push you into the highest tax bracket. 

If you took the annuity option and received payments of $300,000 per year for several decades, you would face a different tax situation. An annuity lets you avoid the highest tax bracket of 37% for single people with incomes greater than $578,125 and for married couples with incomes greater than $693,750 filing jointly in 2023. 

Need more information? 

As you can see, the question of deciding between lump sum vs. annuity payments depends on a variety of factors. It’s vital that you consider the pros, cons, and implications of both payment types, as well as your own circumstances, preferences, and needs.  

Seek the expert financial advice you need to help understand your options and make the best decisions for your money. Let Unbiased match you with an SEC-regulated advisor to secure your financial future and ensure you make more confident decisions.

Senior Content Writer

Rachel Carey

Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.