What choices come with a pension lump-sum offer?

If your pension plan offers a lump sum, you are usually choosing among a handful of paths. The exact menu depends on your plan and on your situation: retiring, leaving with a deferred benefit, or answering a limited-time offer.

• Keep the monthly pension, paid for your life, or for your life and a survivor's.
• Take the lump sum and roll it directly into an IRA or another employer plan that accepts rollovers.
• Take the lump sum in cash and pay income tax on it.
• Roll the lump sum into an IRA and use part of it to buy an annuity from an insurance company.
• Leave a deferred benefit in the plan and decide later, if the plan allows it.

How is the lump sum calculated?

The lump sum is the present value of the monthly pension you would otherwise receive. Federal law requires the plan to pay at least the amount produced by the IRS minimum present value segment rates and the mortality table the IRS prescribes for the year. Higher interest rates mean a smaller lump sum, and lower rates mean a bigger one. Plans lock in the rates for a stability period, which can be a month, a quarter, or a plan or calendar year, so ask which period your payout date falls in.

If your benefit is a cash balance account, the lump sum is generally the account balance instead, and it does not move with the IRS rates in the same way.

How do taxes work for each option?

Monthly pension checks are taxed as ordinary income as you receive them. A lump sum is generally an eligible rollover distribution, so a direct rollover to an IRA or plan defers income tax until you withdraw the money. If the plan pays the lump sum to you, it must withhold 20% for federal income tax, and you have 60 days to roll the payment over, replacing the withheld amount from other funds if you want the whole sum to stay tax-deferred.

The taxable part of a payout taken before age 59 1/2 can face an additional 10% tax unless an exception applies. Leaving your job in or after the year you turn 55 is one exception for workplace plan payouts, but it does not follow the money into an IRA. Rolled-over money becomes subject to required minimum distributions at age 73, or 75 if you were born in 1960 or later.

If you are married, a lump sum generally needs your spouse's written consent, witnessed by a notary public or plan representative, because the default form for a married participant is a joint and survivor annuity.

What does it mean when an employer buys annuities for its pension?

Some employers transfer part of their pension obligations to an insurance company, a deal often called a pension risk transfer. In a "buyout," the plan buys a group annuity contract and the insurer takes over paying the covered retirees directly; in a "buy-in," the plan buys the contract as an investment and keeps paying retirees itself.

In a buyout, the monthly amount and payment form you already have generally carry over to the insurer. What changes is who stands behind the payment. Once the plan buys an irrevocable annuity that covers your benefit, PBGC coverage for that benefit ends. State insurance guaranty associations back the annuity if the insurer fails, up to limits that vary by state but are at least $250,000 in present value of annuity benefits everywhere.

Plan fiduciaries choosing the insurer are held to federal standards set out in Labor Department Interpretive Bulletin 95-1, which tells them to weigh the insurer's claims-paying ability and financial strength. If you receive a notice that your benefit is moving to an insurer, keep it, along with the insurer's name and contact details.

What about buying your own annuity with a lump sum?

You can roll a lump sum into an IRA and buy an immediate annuity from an insurance company with some or all of it. This turns the lump sum back into monthly income, but the price an insurer charges for a given monthly amount may be higher or lower than the value your plan's annuity gives you, so get quotes before you give up the plan's monthly option. An annuity you buy yourself is backed by the insurer and the state guaranty association, not by PBGC.

What does PBGC cover if you keep the plan's annuity?

For a single-employer plan, PBGC can take over an underfunded plan that ends and pay benefits up to legal limits. For a plan ending in 2026, the most PBGC can pay a retiree starting at age 65 is $7,789.77 a month as a straight-life annuity, or $7,010.79 a month as a joint and 50% survivor annuity when both spouses are the same age. PBGC says most of the benefits it pays fall below that limit.

What should you compare before deciding?

• The lump sum next to the monthly amount for each payment form, including the survivor options.
• The interest rates and mortality table behind the lump sum, and how long the quote is good for.
• What an insurer would charge for the same monthly income, from at least two quotes.
• Your health, your other savings and income, and what your spouse would need if you die first.
• The tax cost of each path, including whether a direct rollover fits your plans.

What lump-sum and annuity choices does Caterpillar's pension offer?

Which of those options is open to you depends on which Caterpillar pension formula covers your record. Under the Pension Equity Plan (PEP) formula, the lump sum equals Final Average Monthly Earnings times 12 times a factor set by years of vesting and credited service, and a participant can convert that sum into a lifetime monthly annuity using the plan's own actuarial factors instead of taking cash or a rollover. The Traditional Pension Plan formula, covering benefits earned before July 1, 2003, pays only annuity forms, generally the greater of a final-earnings calculation or a credited-service calculation. A higher lump-sum conversion rate shrinks the payout: Caterpillar's 2024 filing reported a rate increase that lowered the lump sum's present value, while its 2025 filing reported a rate decrease that raised it. In August 2026 Caterpillar announced a special election window, September 14 through October 30, 2026, for certain terminated vested Retirement Income Plan participants to choose a lump sum or a monthly annuity starting in December 2026; ask the Benefits Center if that window applies to you before it closes.

Has Caterpillar purchased annuities for its pension?

Caterpillar's pension filings show no sign of handing retiree payments to an insurer. Its Form 5500 Schedule H lists no payments to insurance carriers, and its 10-K pension tables show no settlement activity for 2024 or 2025, so the plan still stands behind the payment described above, not an outside insurer. Ask Caterpillar directly for written confirmation before choosing between the plan's own annuity and a lump sum used to buy one yourself.