I retired 9 months ago and faced the same decision as you, rescueme and many others. Rescueme and I have (respectfully?) disagreed on this subject, but now I may see a big reason why (a SPIA was more attractive 5 years ago).
As you probably know, for a given monthly payout, the upfront costs of an annuity correlate with interest rates (actually determined by GATT/PPA rates). With interest rates currently at historic lows, this is a bad time to buy an annuity if you can avoid it (not everyone can defer though), and I'll illustrate next paragraph. However, what makes this a bad time to buy an annuity, should actually makes this an ideal time to take a lump sum.
I had earned a fixed monthly non-COLAd pension payout with my previous employer. Lump sum was always an alternative. At historic average interest rates, my lump sum payout would have been almost exactly 100 times my earned monthly payout (6.25% IIRC). When I retired Jun 2011, my lump sum was 170 times my earned monthly payout
because interest rates were so low. Lump sums had never been higher in my experience. Since I can always buy an annuity on my own
and the lump sum was a small part of our total portfolio (more later), it was a no-brainer IMO to take the lump sum. If/when I decide I want to buy an annuity when interest rates increase (and they will, though it will be several years it seems), I can get the same monthly payout for less, or a larger payout for the same lump sum.
Using the numbers above, an annuity that would provide $X/month income would cost $170,000 today - in an average interest rate period I could get the same $X/month income at an annuity cost of $100,000.
If you're concerned about losing the lump sum, you can invest very conservatively while you wait. If interest rates don't change at all, an annuity becomes less expensive each year as well, because where you might have been buying X years of income this year, next year you'll be buying X-1 years of income so the upfront annuity cost decreases. And most important IMO, if markets provide decent real returns your lump sum can grow and you could then later buy an annuity for less and pocket a substantial investment gain as well. I can give you an 8-page article that explains this.
From The Bogleheads Guide to Investing (brackets my comments):
"A final way to ensure income for life is to use part of your savings [your lump sum] to purchase an immediate annuity that guarantees a fixed monthly income. Although an annuity can be a good option for those ages 75 or older, it has its drawbacks, especially for younger retirees. First, the younger you are, the lower the payout is. Second, the monthly income rate is based on current interest rates [book was published in 2007, interest rates are even lower now], and in recent years, interest rates have been low, making the payouts relatively small [and conversely, lump sums relatively larger]. Third, most immediate annuities have no provision for inflation. With the possibility of retirement lasting 30 years or more, the purchasing power of an annuity will almost surely erode over time. You can purchase inflation-adjusted annuities, but the initial payments will be lower than those of a regular annuity. Finally, if you give the insurance company a hefty sum without choosing a term-certain payout option, and then die prematurely, it can be a very bad decision for your heirs."
This is very good advice from rescueme's post that everyone facing the pension vs lump sum question should check:
"I used Immediate Annuities - Instant Annuity Quote Calculator. , along with quotes through both VG and FIDO." You should check to make sure the lump sum you've been quoted matches closely with the current cost of an equivalent annuity - if not, you need to find out why before you make your decision.
You haven't mentioned where your income will come from if you take the lump sum. Other sources? If your plan is to take the lump sum and hold it as cash/MMF and just spend it, you're probably better off with the company annuity unless you know for a fact that your lifespan will be very short.
You also haven't mentioned how significant the company annuity or lump sum are in your overall portfolio,
that could make a big difference. If the lump sum is small relative to your portfolio, IMO it's a no-brainer to take the lump sum and purchase an annuity later when interest rates and annuity costs are more favorable. But if the lump sum is a large (or all) of your portfolio, it's not a no-brainer. If the company annuity would provide considerably more income than you need for projected spending (not common), you still probably want to take the lump sum but you might want to purchase an annuity to cover basic expenses with part of it and pocket the rest. But if the company annuity would be your primary income, you may not be able to safely defer the decision. The answer might change if that's the case, more like rescueme's POV.
Like rescueme "I certainly won't suggest what you should do but just offer the reasoning behind our decision.
Good luck..."
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