Skip to content
× FreshBooks App Logo
Official App
Free - Google Play
Get it
You're currently on our UK site. Select your regional site here:
5 Min. Read

What Is a Lump Sum Payment?

What is a Lump Sum Payment?

Sometimes an unexpected amount of money comes into our lives. It can come from a social security benefit paying out, like a special lump sum death payment. It can also come from high earnings through gambling or other games. If you’re wondering exactly what a lump sum payment is, and what the alternatives are, you’ve come to the right place. Keep reading to learn about lump sum payments!

Here’s What We’ll Cover:

Definition of a Lump Sum Payment

Is a Lump Sum the Best Option?

Is Lump Sum Distribution Available for All Moneys?

Key Takeaways

Definition of a Lump Sum Payment

When someone refers to a lump sum payment, they’re talking about a single large payment that’s being made. These payments normally originate from social security benefits paying out. Sometimes they can come from a pension or a death benefit. Regardless, a lump sum payment indicates that only one payment will be made.

Lump sum payments will sometimes be an alternative to other payment methods. Often, they are offered alongside periodic payments. These payments would stretch over a specified period of time. Choosing the lump sum means collecting money that would be split up and paid over the entire period. Often, benefits payable through instalments or lump sums will have a lump sum period. A lump sum period is the period of time that a beneficiary has to choose the lump sum instead of instalments.

Occasionally, if a beneficiary decides that they want to stop periodic payments, they can choose to receive a lump sum. Often, they’ll receive a reduced sum of money. This money deducted from the total is part of the lump sum proration period. The lump sum is prorated to reflect the amount of money left in the benefit. If this is chosen, then all future payments will stop after the lump sum is paid to the recipient.

Is a Lump Sum the Best Option?

When given the choice between a lump sum and periodic payments, it’s important to weigh both options evenly. Many people are tempted to take the lump sum payment because it is a large upfront payment. This can be very appealing. It gives the recipient instant gratification. However, payments made over time can sometimes be more beneficial.

Lump Sums Are Subject to Higher Tax Brackets

Taking a lump sum will reflect a large amount of income being obtained at one time. This means that it will be subject to a higher tax rate than taking payments over time. Consider a £10 million payment. If received in one large payment, you’ll have to pay taxes on that amount at a single time. If the amount being rewarded is broken into annual payments, it’s likely that they’ll be taxed at a lower rate, meaning that you can save money over time. While it may not be as gratifying as holding millions of pounds at once, it is the smarter option.

Consider Your Current Expenses

Even if a lump sum is going to be taxed at a higher rate, it may enable you to obtain financial freedom. If you have to wait for periodic payments, then you may not be able to pay off all of your debt at once. This means that interest charges can grow, and you’ll spend more money over time. Taking a lump sum can help you avoid any extra charges related to outstanding debts.

Payments Over Time May Not be Realistic

If you’re receiving a lump sum distribution at an older age, taking instalments may not make the most sense. Having the money made available immediately means that you can enjoy it quicker. Depending on your personal circumstances, that may be more important than tax savings of any kind.

Is Lump Sum Distribution Available for All Moneys?

Sometimes you may be tempted to take a lump sum for a benefit or a pension. However, some benefits have penalties for taking money out of them in lump sums. As such, it can be detrimental to take a lump sum, even if it is available. Furthermore, some plans won’t allow for lump sums to be taken to begin with. As such, you’ll have to settle for the payment schedule set up by the benefits program.

Most programs would prefer benefits to be paid out over time, regardless. This means that less money is leaving their pockets at one time, which is why lump sums are penalized. It discourages large payouts from being taken from them on a consistent basis.

Key Takeaways

No matter how you look at it, it’s easy to see that lump sums are a satisfying way to receive money. It gives the recipient a large amount of money at one time. While this is the most gratifying way to receive money, it may not be the best. It may not be available, either. It depends on the benefit being paid out, and how much is being paid. If you’re looking for more help with financial terms and information, be sure to check our resource hub!