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The case for getting a monthly annuity

Mitchell is more skeptical. "Retirement is creating a feeding frenzy in the financial services industry. (Investment advisers) can provide a valuable service, but too often they're like ambulance chasers," he says.

Private annuity considerations

Some people shun the company pension annuity in favor of a private annuity, looking for safety or to escape any reliance on a previous employer. "But you are just shifting your risk from one company to another -- from a former employer to an insurance company," says Mitchell.

When an insurance company goes belly up -- and it happens -- the fallback is a state guarantee association. Insurance companies are generally required to participate in the guarantee association in the state in which they are based, or domiciled as it is called in the industry. Most states guarantee only $100,000. If you have more than that tied up in an annuity, you could lose it.

Mitchell recommends that anyone in the market for a private annuity should reduce the risk by splitting their money among two or three highly rated insurers domiciled in different states.

Protections with a company pension

Company pensions come with better guarantees than private insurance firms. If the worst happens and your company goes belly up, your pension will probably survive, mostly intact. The quasi-governmental Pension Benefit Guaranty Corp., or PBGC, insures against private pension failure. The PBGC estimated in 2006 that 84 percent of retirees who must rely on it receive 100 percent of their benefits. Those who get less than that are largely higher-earning employees whose benefits exceed the maximums, which for someone retiring in 2010 at age 65 is $4,500 per month for a straight-life annuity and $4,050 for a joint and 50 percent survivor annuity. The PBGC doesn't permit lump sum payouts except when they are less than $3,000.

Employer neutrality

Your employer doesn't benefit when you take the annuity instead of the lump. The Pension Protection Act was passed in an effort to make pension income more secure. Its provisions spell out how a lump-sum option must be calculated, making it actuarially equivalent to the life annuity payout. The law specifies the mortality assumptions and the interest rate based on a combination of the corporate bond yield curve and the 30-year Treasury rate. The change protects lower-paid workers and puts all employee participants on an equal footing. It also makes it unlikely that a company will have a vested interest in whether a retiring employee takes the life annuity or the lump sum.

Next: Lump sum pros and cons

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