What are the implications of taking your pension normally versus a lump sum? A lot of companies offer the lump sum as a way to get out from under the financial obligation of paying you or your spouse until you die.

As a stream of income, your pension will be coming out of your tax-deferred bucket. You also have to realize that once you opt to take your pension as a stream of income you are stuck with that choice regardless of what tax rates are in the future. It will always come out of your tax-deferred bucket, with all the unintended consequences that go along with that.

That doesn’t mean you should always take the lump sum option, but it can be a good deal. You just have to crunch the numbers and understand the tax implications of your choice.

When you take your pension as a stream of income, it counts as provisional income, so in most cases you can count on it causing your Social Security to be taxed. Anything you take out of your other retirement plans will land right on top of that income and be taxed as well.

When 85% of your Social Security gets taxed, which is a situation many people will find themselves in, it forces you to spend down your other assets much faster. You could run out of money 5 to 7 years faster than people who do not have their Social Security taxed.

You can spend your other assets down much faster than you planned, in an attempt to compensate for Social Security taxation that’s brought about by electing to take your pension as a stream of income.

When you’re taking a pension stream of income in retirement, it is 100% exposed to tax rate risk because it is coming out of your tax-deferred bucket. That means you are going to have to find a way to compensate, and when tax rates increase in the future it’s going to be double hit.

A lump sum distribution allows you to roll that money into an IRA. Once it’s there, you could do a Roth conversion and place it into the tax-free bucket. If you’re really bent on having a stream of income you could use a deferred income annuity, which would create that stream of income in a tax-free environment.

Pensions are becoming more scarce, only 40% to 50% of the people we see everyday have one. Most people have 401(k)’s or 403(b)’s. If you do have a pension, you should explore a lump sum distribution before you opt to take that stream of income. You should be aware of your options before you have to make that choice.