It comes down mathematically to whether the pot of cash could be invested to generate a greater inflation-adjusted retirement income than the pension would provide. Wichita, Kan., planner Richard Stumpf, owner of Financial Benefits Inc., told one client who retired in May, "There is nothing I can do that will provide as high a level of guaranteed income as your pension, and we need to guarantee your income using the highest-paying vehicle."
According to van Iwaarden's models, for a given principal, the income from an annuity can be as much as double that provided by the typical 4% withdrawal strategy. See http://pensionblog.com/2010/05/12/lifetime-income-from-dc-plans.
Similarly, the American Academy of Actuaries told the Department of Labor last year that to achieve a given retirement income, "50% to 75% more money would need to be set aside than if an individual participated in a [longevity] risk-pooling arrangement" such as a pension or annuity. (The organization's 21-page letter to the department, at www.actuary.org/pdf/pension/aaa_rfi_050410.pdf, is a good resource for lifetime-income issues.)
But a pension leaves nothing for heirs. Clients who don't need their pension for income often choose the lump-sum benefit precisely because any unspent funds at death can pass to family members. That's important to many clients, Stumpf says.
Besides legacy objectives, the client's personal traits can inform the decision. "If the client is a high spender, the annuity could be the right choice," Hill says. Its fixed nature can stabilize the client's spending.
The vast majority of participants take the lump sum. But investing it subjects the retiree's cash flow to market volatility, Hill points out, and some clients can't handle that emotionally. For them, a steady pension check means sleeping better at night and with luck, loving you for the advice.