Everything about retirement changes if you have a pension in America. Here’s why

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)

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.

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.