Lump Sum or Annuity - Which Is Better?
In the past, legal awards were usually only available as a lump sum. However, people are being increasingly offered a choice between annuities and lump sums – but which is better for you?
When you choose a lump sum payment, you’ll receive the full of the settlement upfront. This payment is usually income-tax free, and you will get a large amount of money in a single instance. This is ideal for paying off substantial debts and legal fees. With a lump sum payment, you have the additional option of investing the remaining proceeds as you wish for continued income over time. You will be required to pay income taxes on the money earned from your investment of the lump sum settlement, however.
An annuity arranges your payment to come in set amounts over a period of time, much like a monthly or annual income. You will receive the steady income from the annuity over a period of time established at the time of the settlement. These payments may last for a short time or for the rest of your life, resulting in an income stream that you can count on and budget from accordingly. An annuity does give you a reliable income, but it also puts the bulk of your settlement in the hands of a managing company which has its own risks.
Ultimately, the best choice for an annuity or lump sum payment is one that you must chose based on your individual circumstances and your personal financial preferences and money management skills.