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nPension payment presents a dilemma to many retirees as they choose the best option that suits their retirement. Pension scheme provide a choice of regular periodic payment for life or lump sum payment. Lifetime payment annuity is a form of payment that pays the retiree regularly until death (Pindyck, & Rubinfeld, 2011). However, these annuities do not take into account the changes in inflation; hence, retiree will lose his/her purchasing power over time. In addition, a retiree using life annuity will not have access to lump sum. Therefore, he cannot make large purchases. On the other hand, lump sum payment is calculated using life expectancy assumptions and interest rates and is the total of expected lifetime annuity (Fidelity viewpoints, 2014).

nChoosing lump sum payment gives a retiree flexibility of the money. Therefore, he can either invest it or use it in his own way. However, unlike the lifetime annuity it is the responsibility of the retiree to ensure that the money last through retirement. Lump sum payment gives a retiree an opportunity to invest it in stock market (Pindyck, & Rubinfeld, 2011). This can generate capital appreciation. Further, he can use it to buy lifetime annuity from an insurance company.

nDetermining the right option

nThe retiree should choose a pension plan that guarantees essential expense such as healthcare, food, clothing and housing. If the retiree has a guaranteed income from another source, the lump sum payment is the best option (Fidelity viewpoints, 2014). However, if he does not have a guaranteed cash flow after retirement, it is advisable to use lifetime payment annuity. In addition, the retiree should consider whether he or her spouse are expected to live longer. If he expects to live longer, he should take lifetime payment annuity.

nMoreover, the retiree should consider his investment skills and that of his spouse. Therefore, he should take lump sum payment if he has past investment history. This is because no one is responsible of managing the funds (Fidelity viewpoints, 2014). In conclusion, there are three steps in taking pension payout (Pindyck, & Rubinfeld, 2011). First, the retiree should understand his/her options, secondly, should decide which is right for him/her based on income needs. Thirdly, should develop a plan for investing or using the money.

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nReferences

nFidelity viewpoints,. (2014). How to Take a Pension Payment — Fidelity.com. Fidelity.com. Retrieved 19 August 2014, from https://www.fidelity.com/viewpoints/retirement/how-to-take-a-pension-payment

nPindyck, R., & Rubinfeld, D. (2011). Microeconomics (1st ed.). Upper Saddle River, N.J.: Pearson Prentice Hall.