How to Convert a Pension to a Lump Sum

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A pension plan pays out money to the person who owns the plan, usually monthly. Finding the lump sum payment of a pension plan is more commonly known as finding the present value. Using the present value of an annuity formula, the plan's investor can figure out how much the plan is worth today. To determine the lump sum amount, the investor needs the interest rate on the plan, how many years the plan will disburse for and the monthly payment. For example, a person receives $600 a month from his pension. The pension makes 6 percent each year and will pay out the next 20 years.

Step 1

Multiply the number of years of repayment by 12 months to determine the months of the pension payment. In our example, 20 years times 12 months equals 240 months.

Step 2

Determine the interest rate per month by dividing the interest rate by 12 months. In our example, 6 percent divided by 12 months equals 0.005.

Step 3

Add one to the interest rate per month. In our example, 1 + 0.005 equals 1.005.

Step 4

Raise the number calculated in step 3 to the power of the number of payments remaining. In our example, 1.005 ^ 240 equals 3.310204.

Step 5

Divide 1 by the number calculated in Step 4. In our example, 1 / 3.310204 equals 0.302096142.

Step 6

Subtract the number calculated in Step 5 from 1. In our example, 1 - 0.302096142 equals 0.697903858.

Step 7

Divide the number calculated in Step 6 by the interest rate per month. In our example, 0.697903858 divided by 0.005 equals 139.5807717. This is the interest factor.

Step 8

Multiply the monthly payment by the interest factor. In our example, $600 * 139.5807717 equals $83,748.47. This is how much the pension is worth if it is paid off in a lump sum right now.

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