Jan 2, 2026
If you’re one of the few American workers with a traditional pension, your retirement strategy likely looks different from that of your peers.
As of March, 2025, only 14% of U.S. workers were covered by a defined benefit pension plan, according to the Bureau of Labor Statistics. (1) These plans are far more common among government employees and retirees.
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In fact, nearly 86% of state and local public sector workers have access to such a pension, according to Congress. (2) And in 2024, 56% of retirees reported receiving pension income, according to the Federal Reserve. (3)
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Depending on your age and your employer, a defined benefit pension could significantly shape your retirement outlook. The guaranteed monthly income offers stability, but it brings unique considerations for tax strategy and estate planning.
Here’s how you can adapt your retirement playbook.
Tax reality
Unlike withdrawals from a 401(k) or an individual retirement account (IRA), pension income is typically fixed and can’t be adjusted. According to the IRS, each pension payment is treated as ordinary taxable income — potentially increasing your tax liability and affecting how much of your Social Security benefits are taxed.
Because pension income counts toward your modified adjusted gross income (MAGI), it can also push you over the threshold for Medicare’s income-related monthly adjustment amount (IRMAA) surcharges, resulting in higher premiums.
Depending on where you live, state taxes may apply as well. Only 15 states fully exempt pension income from state taxation, according to AARP. (4) Review your state’s tax code to see if any exemptions or deductions could reduce your tax burden.
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Lump sum or monthly payments?
Many employer-sponsored pension plans offer a choice between a one-time lump sum payment or lifetime monthly payments (an annuity). Deciding between the two can be complex.
The annuity option provides a guaranteed monthly income, offering long-term financial stability. Most private-sector pensions are insured by the Pension Benefit Guaranty Corporation (PBGC), which protects payments up to certain limits if the employer becomes insolvent.
In many cases, you can also elect survivor benefits to continue payouts to a spouse or beneficiary after your death.
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A lump sum, on the other hand, gives you full control of the money, allowing you to invest it — potentially earning higher returns. It also makes it easier to leave unused funds as inheritance. However, it comes with the risk of market volatility and the possibility of outliving your savings.
The bottom line
Traditional pensions are increasingly rare, but if you’re part of a defined benefit plan, you have the valuable advantage of guaranteed retirement income.
However, that steady income can complicate other key decisions — such as when to claim Social Security, where to live, how to manage your tax liability and what to leave behind for your heirs.
Working with a financial professional can help you weigh these factors, balance competing priorities and make the most of your pension.
Article sources
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
Bureau of Labor Statistics (1); Congress.gov (2); Federal Reserve (3); AARP (4)
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Vishesh Raisinghani is a financial journalist covering personal finance, investing and the global economy. He's also the founder of Sharpe Ascension Inc., a content marketing agency focused on investment firms. His work has appeared in Moneywise, Yahoo Finance!, Motley Fool, Seeking Alpha, Mergers & Acquisitions Magazine and Piggybank.
