Pension Estate PlanningWhen workers retire from an employer that offers pension benefits, they are typically offered the option of receiving a lump sum payment of retirement money or receiving monthly pension payments. This is an important question to consider from an estate planning perspective and it can only be answered on the basis of one's personal situation and needs.

When the lump sum distribution is taken, the retiree will have a chunk of money rolled over into an IRA. This provides the freedom to make investment choices to generate retirement income needed for living expenses. Having the assets under one's control will provide a lot of estate planning freedom, and it will allow the individual to bequeath that money to heirs via a will. However, this option comes with risks -- mainly, the risk of investment losses, which could translate into lower retirement income. In the worst case scenario, one could even lose it all.

Are Pension Recipients Happier?

Accepting guaranteed monthly pension payments, which are made through an annuity, offers a benefit that should not be overlooked: security. A 2012 report on retirement happiness indicated that retirees with pension incomes maintained a happier disposition than those without -- even when they were living at similar levels of physical health and economic wealth.

Nevertheless, the higher level of happiness could be temporary if inflation affects purchasing power later in life. Indeed, the purchasing power of $100 will be far less in 15 years.

Pensions May Be Worse for Wealthier Retirees

The lump sum distribution provides retirees with the ability to change their investments to respond to shifting market conditions and it allows them to take market risks in order to increase their net worth. Especially if the individual is not completely dependent upon the pension for living expenses, taking the lump sum could be better, because it will allow them to control these assets and leave them to their heirs.

Perhaps more importantly, because the Pension Benefit Guarantee Corporation only covers pensions up to $59,318 per year, those who receive higher dollar pensions are at serious risk if the pension goes bankrupt. Therefore, people who receive large pensions may be better off taking the lump sum distribution.

For those receiving smaller pensions who need a source of economic security, the pension could be better. Even though an individual will not be able to leave their pension money to their relatives when they die (if they opt for the pension route), a secure, annuitized income could make them happier later in life. This level of happiness and security might be more valuable to some individuals than having investment and estate planning flexibility.