A break-even calculator for a pension: lump sum or monthly payments?
When a pension plan offers you a lump sum instead of a monthly pension, the question is simple to ask and hard to answer: which is worth more? This break-even calculator for pensions finds the age at which the monthly payments have caught up with the lump sum — both in plain totals and after allowing for what the lump sum could earn if you invested it.
Enter the lump sum, the monthly pension, your age, any yearly cost-of-living increase (COLA) and a discount rate. You get the break-even ages, the present value of the pension up to an age you choose, the return the pension effectively pays on the lump sum, and the monthly income the lump sum could buy instead. It works in dollars, rupees, pounds or euros and runs entirely in your browser. It is an estimate, not financial advice.
How to use the Pension Lump Sum vs Annuity Break-Even Calculator
- Choose the currency and enter the lump sum offered and the monthly pension you would get instead.
- Enter your age now and the age the pension starts (later for a deferred pension).
- Set “Compare up to age” to your life expectancy — or a few years beyond it to be cautious.
- Enter a discount rate (a safe return you could earn on the lump sum), any yearly pension increase and, if they differ, the tax rates on each choice.
- Read the discounted break-even age, the verdict, the chart and the table; download the CSV or copy the summary.
Pension Lump Sum vs Annuity Break-Even Calculator features
Two break-even points
The simple age when payments equal the lump sum, and the discounted age when they are worth the same today.
Pension calculator with COLA
Payments step up by your chosen percentage every year.
Implied return
The yearly return the pension pays on the lump sum if you live to the age you choose.
Deferred pensions and tax
A later start age and separate tax rates on the lump sum and the pension.
Chart, table and CSV
Totals, present values and the lump sum left if you drew the same income from it.
How the break-even age is worked out
Payments are made at the end of each month and rise once a year by the COLA. The simple break-even is the month when their running total reaches the lump sum. The discounted break-even divides each payment by (1 + i)m, where i is the monthly equivalent of your discount rate and m the months from now; it is the month when the present value of the payments reaches the lump sum. It is also exactly when an invested lump sum, paying you the same pension, would run out.
Worked example: $250,000 or $1,500 a month from 65. Without discounting, $250,000 ÷ $1,500 = 166.7 months, so the pension catches up at 78 and 11 months. At a 5% discount rate the 240 payments to age 85 are worth $1,500 × (1 − 1.05−20) ÷ 0.4074% ≈ $229,400 today — less than the lump sum — and the discounted break-even moves out to 88 and 4 months. The pension’s implied return to 85 is about 3.96% a year.
| Discount rate | Value of $1,500 a month for 20 years | Better choice vs $250,000 |
|---|---|---|
| 0% | $360,000 | Pension |
| 3% | ≈ $271,500 | Pension |
| 5% | ≈ $229,400 | Lump sum |
| 7% | ≈ $196,700 | Lump sum |
Choosing the discount rate and the age
- Discount rate: use a return you could reliably earn on the lump sum after fees — a high-quality bond yield is a common benchmark. A higher rate favours the lump sum.
- Age: the pension wins the longer you live. Check your figure with the life expectancy calculator and try a few ages either side.
- COLA: a pension that rises with prices is worth much more than a flat one; if yours is flat, leave it at 0% and compare in nominal terms.
- Implied return: if the pension’s implied return is higher than anything safe you could earn, the pension is usually the better deal for someone in average health.
What a break-even calculation does not capture
A pension is insurance against living a long time and against poor investment returns; a lump sum gives flexibility, something to leave to heirs and protection if the plan is weak. Survivor or joint-life options, guarantees by a national pension insurer, how lump sums are taxed or rolled over, and your other income all matter. For US Social Security claiming ages use the Social Security break-even calculator; for Australian super, the superannuation calculator; for Indian government pension commutation, the central government pension calculator.
Pension Lump Sum vs Annuity Break-Even Calculator FAQ
How do I calculate the break-even point for a pension?
Divide the lump sum by the monthly pension to get the months needed to catch up (the simple break-even). For a fairer comparison, discount each payment at the return the lump sum could earn and find when their present value reaches the lump sum — this calculator does both.
Is it better to take a pension lump sum or monthly payments?
It depends on how long you live, the return you could earn and whether the pension rises with inflation. If the pension’s implied return is above a safe investment return and you expect an average or long life, the monthly pension usually wins.
Is there a pension calculator with COLA?
Yes — enter the yearly cost-of-living increase and every year’s payments step up by that percentage, which brings the break-even age earlier.
What discount rate should I use?
A return you could earn with similar safety — often a high-grade bond or annuity rate. Try a range, for example 3%, 5% and 7%.
Does it include taxes?
Only the flat rates you enter for the lump sum and the pension. Tax rules differ by country and by whether a lump sum is rolled over, so check your own situation.
Is this break-even calculator free?
Yes. It is free, needs no sign-up and runs entirely in your browser.