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RETIREMENT PLANNING PENSIONS

What Is a Lump-Sum Payment, and How Does It Work?

By ADAM HAYES Updated December 07, 2022

Reviewed by ROGER WOHLNER

Fact checked by SUZANNE KVILHAUG

Lump-Sum Payment: A monetary sum paid all at once rather than in installments.

Investopedia / Ryan Oakley

What Is a Lump-Sum Payment?

A lump-sum payment is a monetary sum paid in one single payment instead of allocated into
installments. They are commonly associated with pension plans and other retirement vehicles, such as
401(k) accounts, where retirees accept a smaller upfront lump-sum payment rather than a larger
payment issued in installments over time.

In mortgage lending, a "bullet repayment" is the lump-sum of the outstanding loan paid to a lender.

KEY TAKEAWAYS

A lump-sum payment is an amount paid all at once, as opposed to an amount that is paid in
installments.

A lump-sum payment is not the best choice for everyone; for some, it may make more sense for the
funds to be annuitized as periodic payments.

Based on interest rates, tax situation, and penalties, an annuity may end up having a higher net present
value (NPV) than the lump-sum.

Understanding a Lump-Sum Payment

Lump-sum payments can describe a bulk payment to acquire a group of items, such as a company
paying one sum for the inventory of another business. Lottery winners will also typically have the option
to take a lump-sum payout versus yearly payments.

There are pros and cons to accepting a lump-sum payment rather than an annuity, fixed payments over
a period of time. The right choice depends on the value of the lump sum versus the payments and one’s
financial goals. The company providing the pension will calculate the commuted value of the pension to
ensure they can meet their obligations.

Annuities provide a degree of financial security, but an older retiree in poor health might derive greater
benefit from a lump-sum payment. Securing an upfront payment often guarantees an asset to pass on to
your heirs.

An upfront payment might enable you to buy a house or other large purchase that you would otherwise
not be able to afford with annuities. Similarly, you can invest the money and potentially earn a higher
rate of return than the effective rate of return associated with the annual payments.