Pension vs Lump Sum Calculator
This tool helps you compare a lifetime pension (expressed as an annual payment) with a one-time lump-sum offer. It computes the present value of the pension using a discount rate and a growing-annuity formula, and compares that to the lump-sum amount after immediate tax withholding. It also shows the equivalent sustainable annual withdrawal if the lump sum were invested at an expected return.
Use the inputs to model your specific circumstances: expected years of payments (life expectancy), discount and investment return assumptions, expected tax on the lump sum, and any expected annual escalation (cost-of-living adjustments) to the pension. Results are indicative and meant to support decision-making, not replace professional advice.
Governance
Record 07d86b714f98 • Reviewed by Fidamen Standards Committee
Computes the present value of a (potentially escalating) annual pension using a discount rate, compares it to the lump-sum net of tax, and shows the equivalent sustainable annual withdrawal if the lump sum is invested at an expected return.
Inputs
Results
Present value of pension
$24,000,000.00
Lump sum (net after immediate tax)
$400,000.00
Equivalent annual withdrawal (if lump sum invested)
-$800.00
Annuity PV minus lump net
$23,600,000.00
| Output | Value | Unit |
|---|---|---|
| Present value of pension | $24,000,000.00 | USD |
| Lump sum (net after immediate tax) | $400,000.00 | USD |
| Equivalent annual withdrawal (if lump sum invested) | -$800.00 | USD |
| Annuity PV minus lump net | $23,600,000.00 | USD |
Visualization
Methodology
The pension is modeled as a potentially escalating annual payment A0 for a fixed number of years n. The present value is calculated using a standard growing-annuity formula discounted at the chosen discount rate.
The lump sum is compared on a net-of-immediate-tax basis (simple withholding). We also compute the sustainable level annual withdrawal from the lump sum if invested at the expected return, using the capital recovery formula.
This calculator intentionally separates the discount rate (used for valuing the pension) from the expected investment return (used to model what the lump sum could generate). This avoids conflating purchasing power and portfolio return assumptions.
Key takeaways
If PV of the pension is greater than the lump net, the pension has higher risk-adjusted value under your assumptions. If the lump net is higher, investing the lump may produce higher sustainable income.
Results are sensitive to the discount rate, expected investment return, tax treatment, and the assumed number of years. Small changes in these inputs can change the recommendation.
Worked examples
Example 1: A0 = 36,000; g = 0%; r = 3%; n = 20 → PV ≈ 36,000 * (1 - (1/1.03)^20) / 0.03.
Example 2: Lump offer = 500,000; tax = 20% → Lump net = 400,000. If expected return r_ret = 4% and n = 20, sustainable withdrawal ≈ 400,000 * 0.04 / (1 - 1.04^-20).
F.A.Q.
Why separate discount rate and expected investment return?
Discount rate reflects the value you place on receiving money today versus later and incorporates risk and alternative uses of funds. Expected investment return is an assumption about how the lump sum might grow. Keeping them separate clarifies trade-offs and avoids double-counting.
What if the discount rate equals the escalation rate?
If the discount rate r is equal to escalation g, the standard growing-annuity formula divides by zero. In practice, set r slightly above g or consult an advisor. The tool flags sensitivity to r ≈ g in its guidance; do not rely on exact equality.
Does the calculator include ongoing taxes on investment returns?
No. The tool applies a simple immediate tax assumption to the lump sum. It does not model annual taxes on investment income, capital gains, or specific tax-deferred account rules. Use the results as a baseline and consult a tax professional for detailed modelling.
How should I choose the discount rate?
Choose a discount rate that reflects your personal time preference, portfolio risk tolerance, and alternative investment opportunities. Consider using conservative assumptions and test sensitivity with several plausible rates.
Is joint-survivor coverage modeled?
Not explicitly. Joint-survivor options change payment rules and effective life expectancy. If relevant, increase the expected number of payment years or seek a tailored actuarial quote; then re-run the comparison.
Sources & citations
- NIST Special Publication on Risk Management and Controls (relevant for model validation and security) — https://nvlpubs.nist.gov/nistpubs/SpecialPublications/NIST.SP.800-53r5.pdf
- ISO guidance on information security management (for data handling and QA) — https://www.iso.org/isoiec-27001-information-security.html
- IEEE standards and best-practice resources (for engineering controls and validation processes) — https://standards.ieee.org/
- OSHA guidance (for workplace safety and operational controls where applicable) — https://www.osha.gov/
- IRS Publication 590-B — Distributions from Individual Retirement Arrangements — https://www.irs.gov/publications/p590b
- IRS Required Minimum Distribution Worksheets — https://www.irs.gov/retirement-plans/plan-participant-employee/required-minimum-distribution-worksheets
- Social Security Administration — Retirement Benefits — https://www.ssa.gov/benefits/retirement/
Further resources
Versioning & Change Control
Audit record (versions, QA runs, reviewer sign-off, and evidence).
Record ID: 07d86b714f98What changed (latest)
v1.0.0 • 2025-11-03 • MINOR
Initial publication and governance baseline.
Why: Published with reviewed formulas, unit definitions, and UX controls.
Public QA status
PASS — golden 25 + edge 120
Last run: 2026-01-23 • Run: golden-edge-2026-01-23
Versioning & Change Control
Audit record (versions, QA runs, reviewer sign-off, and evidence).
What changed (latest)
v1.0.0 • 2025-11-03 • MINOR
Initial publication and governance baseline.
Why: Published with reviewed formulas, unit definitions, and UX controls.
Public QA status
PASS — golden 25 + edge 120
Last run: 2026-01-23 • Run: golden-edge-2026-01-23
Engine
v1.0.0
Data
Baseline (no external datasets)
Content
v1.0.0
UI
v1.0.0
Governance
Last updated: Nov 3, 2025
Reviewed by: Fidamen Standards Committee (Review board)
Credentials: Internal QA
Risk level: low
Reviewer profile (entity)
Fidamen Standards Committee
Review board
Internal QA
Entity ID: https://fidamen.com/reviewers/fidamen-standards-committee#person
Semantic versioning
- MAJOR: Calculation outputs can change for the same inputs (formula, rounding policy, assumptions).
- MINOR: New features or fields that do not change existing outputs for the same inputs.
- PATCH: Bug fixes, copy edits, or accessibility changes that do not change intended outputs except for previously incorrect cases.
Review protocol
- Verify formulas and unit definitions against primary standards or datasets.
- Run golden-case regression suite and edge-case suite.
- Record reviewer sign-off with credentials and scope.
- Document assumptions, limitations, and jurisdiction applicability.
Assumptions & limitations
- Uses exact unit definitions from the Fidamen conversion library.
- Internal calculations use double precision; display rounding follows the unit's configured decimal places.
- Not a substitute for calibrated instruments in regulated contexts.
- Jurisdiction-specific rules may require official guidance.
Change log
v1.0.0 • 2025-11-03 • MINOR
Initial publication and governance baseline.
Why: Published with reviewed formulas, unit definitions, and UX controls.
Areas: engine, content, ui • Reviewer: Fidamen Standards Committee • Entry ID: 2dbc686008f0
- https://nvlpubs.nist.gov/nistpubs/SpecialPublications/NIST.SP.800-53r5.pdf
- https://standards.ieee.org/
- https://www.irs.gov/publications/p590b
- https://www.irs.gov/retirement-plans/plan-participant-employee/required-minimum-distribution-worksheets
- https://www.iso.org/isoiec-27001-information-security.html
- https://www.osha.gov/
- https://www.ssa.gov/benefits/retirement/