A traditional pension usually comes with one decision that cannot be undone: a monthly check for life or a single payment up front. The plan’s benefit formula determines the monthly amount. The lump sum converts that promise into cash, and the math behind it uses interest rates the IRS publishes monthly.
Those rates have climbed. For August 2026, the three IRS segment rates that set the floor for most private-sector pension lump sums were 4.65%, 5.75% and 6.73%. In August 2025, they were 4.20%, 5.29% and 6.08%.
A higher rate means a smaller lump sum for the same pension. For anyone whose benefits start near the turn of the year, the start date could be worth thousands of dollars.
Why higher rates mean less cash
A lump sum should equal what the stream of future pension checks is worth today. The plan discounts each future payment using an interest rate, and the higher the rate, the less money the math assumes you need up front to produce the same income later.
Under Section 417(e) of the tax code, a lump sum generally cannot be smaller than the value figured with IRS segment rates and an IRS mortality table. The three rates come from corporate bond yields and apply to payments expected within five years, from five to 20 years, and beyond 20 years. Younger retirees tend to feel increases more, since more of their checks are decades away.
Benefits consulting firm Mercer has noted that a one-percentage-point gap in these rates can move lump-sum values by roughly 10% to 15%. By that yardstick, a half-point rise in a year could trim a comparable offer by 5% or more. On a $400,000 lump sum, 5% is $20,000.
Your plan’s calendar decides which rates apply
Plans do not reprice lump sums every day. Each sets a stability period, during which one set of rates applies, and a lookback month that determines which rates those are.
According to Mercer, the stability period can run from one month to a full year, and the lookback can reach back as far as five months. A plan that resets every Jan. 1 can use rates from any month from August through December of the year before.
In a plan built that way, a lump sum with a 2026 start date would generally be priced with rates from late 2025, while a 2027 start date would use rates from late 2026.
Late-2025 rates ran below August 2026’s, but most late-2026 rates have not been published yet. If they stay near current levels, starting benefits before the reset could produce a larger check. Plans that update monthly or quarterly may have already passed along much of the increase.
The summary plan description spells out the rules, and the benefits office can confirm them. The most useful request is written lump-sum estimates for two start dates, one before the next reset and one after.
The monthly check does not shrink
Rising rates change the cash-out price, not the pension. A plan that promises $2,500 a month still owes $2,500 a month. Higher rates also tend to make annuities sold by insurers pay more per dollar, so a smaller lump sum is not automatically a worse deal.
For people who want lifetime income but more control, there are lower-cost ways to buy a guaranteed paycheck than a commissioned annuity.
Details that can cost more than the rate
When a plan pays a lump sum directly to you, it generally must withhold 20% for federal income tax, even if you plan to roll the money into an IRA within 60 days. Asking the plan to send the money straight to an IRA avoids that withholding.
Married participants need a spouse’s signature. A lump sum usually replaces the survivor annuity, which must pay a surviving spouse at least 50% of the participant’s benefit, and the IRS requires written consent witnessed by a notary or a plan representative to give it up.
Money rolled into a traditional IRA eventually becomes subject to required minimum distributions, which can raise taxes and Medicare premiums later.
Because the choice is usually permanent, it can help to run the numbers with a professional who is legally required to put your interests first. SmartAsset offers a free matching service that connects you with up to three fiduciary financial advisors. Its questionnaire has about 37 questions, takes about 10 minutes and asks for a phone number near the end, and you control whether and when you respond to anyone.
SmartAsset makes the match, and the advisors give the advice. The service is designed for people with at least $100,000 in investments.
Two estimates before one signature
Pension paperwork rarely says which month’s interest rates sit behind the number on the page, so ask. If the plan locks in a full year of rates at a time, the gap between a December start date and a January start date could run to thousands of dollars, and the plan can put both figures in writing before anything is signed.
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