Pension Lump Sum in 2026 or 2027? Higher IRS §417(e) Rates in Notice 2026-65 Could Shrink 2027 Payouts

One-sentence takeaway

If you have a traditional defined benefit pension that offers a lump sum, the IRS interest rates that set the minimum lump sum for 2027 are clearly higher than the rates used for 2026 (for example, August 2026 segment rates of 4.65% / 5.75% / 6.73% versus 4.20% / 5.29% / 6.08% in August 2025, and September 2026 rates of 5.06% / 5.99% / 6.72% in IRS Notice 2026-65), so for many plans a lump sum with an annuity starting date in 2027 may be noticeably smaller than one that starts in 2026. Whether you are affected depends on your plan's "lookback month" and "stability period," and many plans need paperwork 30 to 90 days in advance, so November 2026 is the time to ask your plan for both quotes and plan the tax side (rollover, withholding and the 10% additional tax).

News background

On October 20, 2026, the IRS released Notice 2026-65, its monthly update of pension interest rates. It reports the September 2026 spot segment rates used under Internal Revenue Code §417(e)(3): 5.06% (first segment, payments in years 1–5), 5.99% (second segment, years 6–20) and 6.72% (third segment, after 20 years).

Under §417(e)(3), a defined benefit plan's lump sum (and certain other accelerated payment forms) cannot be less than the present value of the participant's annuity calculated with these segment rates and the IRS applicable mortality table. Higher interest rates mean a lower present value, so a higher-rate year generally produces smaller minimum lump sums.

The IRS "Minimum present value segment rates" table shows how much the rates have moved. August 2025: 4.20 / 5.29 / 6.08. August 2026: 4.65 / 5.75 / 6.73. September 2025: 4.06 / 5.12 / 5.93. September 2026: 5.06 / 5.99 / 6.72.

The mortality assumption also changes each year. Notice 2026-27 (Internal Revenue Bulletin 2026-21) published the 2027 "Unisex" table for §417(e)(3), which applies to annuity starting dates in stability periods beginning in 2027.

Under Treas. Reg. §1.417(e)-1(d), each plan chooses a stability period (one month, a plan or calendar quarter, or a plan or calendar year) and a lookback month (the first through fifth full calendar month before the stability period starts). Many calendar-year plans use August, September, October or November of the prior year. Rates for October through December 2026 had not been published when this article was written.

Old vs. new

Rates for 2026 annuity starting dates (calendar-year stability period): August 2025 lookback 4.20 / 5.29 / 6.08; September 2025 lookback 4.06 / 5.12 / 5.93; October 2025 lookback 4.01 / 5.04 / 5.83; November 2025 lookback 4.07 / 5.15 / 6.01.

Rates for 2027 annuity starting dates: August 2026 lookback 4.65 / 5.75 / 6.73; September 2026 lookback 5.06 / 5.99 / 6.72; October and November 2026 rates not yet published.

Direction: Roughly 0.4 to 1.0 percentage point higher across the segments, which generally lowers the minimum lump sum. The effect is usually larger for younger participants because their payments are further in the future.

Mortality table: 2026 lump sums use the 2026 unisex table; 2027 lump sums use the Notice 2026-27 unisex table. The mortality change is usually small compared with the rate change.

What does not change: The monthly annuity you have earned does not drop because of these rates. Only the lump sum (and some other accelerated forms) is recalculated. 401(k) balances and most cash balance account values are not reduced by §417(e) rates, although some cash balance plans can be affected.

Self-check

Do you have a traditional pension that offers a lump sum? Check your benefit statement or summary plan description (SPD). If it only pays an annuity, this rate change mainly matters for your planning, not your payment.

Are you near retirement or already separated from service? Ask the plan administrator for a lump-sum estimate with a 2026 annuity starting date and one with a 2027 date, and ask which lookback month and stability period the plan uses.

Is the last 2026 annuity starting date still reachable? Many plans set annuity starting dates on the first of a month, so December 1, 2026 is often the last 2026 date. Ask for the paperwork deadline.

Are you married? A lump sum generally requires your spouse's written, witnessed or notarized consent to waive the joint and survivor annuity (§417(a)). Allow time for this.

Will you take cash or roll it over? A lump sum paid to you is subject to 20% mandatory federal withholding. A direct rollover to an IRA or another eligible plan avoids that withholding and defers tax.

Are you under age 59½? A lump sum you keep can face the 10% additional tax, unless an exception applies, such as separation from service in or after the year you turn 55.

Will you live outside the U.S., or are you not a U.S. tax resident? Withholding (Form W-8BEN), treaty rules and residency need a separate review before you elect.

Simplified example

This is a simplified illustration that uses IRS segment rates. It ignores mortality and plan-specific rules, so it is not a calculation for any real plan or person.

Assume a pension of $3,000 per month ($36,000 per year) paid for 20 years. Years 1–5 are discounted at the first segment rate and years 6–20 at the second segment rate.

1. Plan with an August lookback: with August 2025 rates (2026 lump sum) the present value is about $442,560. With August 2026 rates (2027 lump sum) it is about $426,128. The difference is about $16,432, or 3.7%.

2. Plan with a September lookback: September 2025 rates give about $448,760. September 2026 rates give about $417,169. The difference is about $31,591, or 7.0%.

3. Tax side: if the participant takes $426,128 in cash, the plan must withhold 20%, or about $85,226, and the full amount is generally taxable in the year paid. If it is directly rolled over to a traditional IRA, there is no withholding and no current tax.

Real plan numbers also depend on age, mortality, plan formulas and early retirement subsidies. Always use the plan's official quote.

Action steps and timeline

Now to mid-November 2026: Ask the plan for written lump-sum and annuity quotes for a 2026 and a 2027 annuity starting date, plus the lookback month, stability period and paperwork deadline.

Mid-November 2026: The IRS usually publishes the October 2026 rates around this time. If your plan uses an October lookback, recheck the 2027 estimate.

Before your plan's 2026 deadline (often for a December 1, 2026 start): If you choose a 2026 date, return the election forms and spousal consent on time and set up the receiving IRA for a direct rollover.

December 31, 2026: Distributions paid in 2026 are 2026 income unless directly rolled over. Consider estimated tax if you take cash.

January 15, 2027: The fourth 2026 estimated tax payment is due.

By February 1, 2027: Plans must furnish Form 1099-R (the January 31 due date falls on a Sunday). A direct rollover is generally shown with code G.

April 15, 2027: Report the distribution on your 2026 Form 1040, including a rollover, which is reported but generally not taxed.

How YCL can help

Lump sum or annuity review: We compare the plan's 2026 and 2027 quotes with your age, health, spouse benefits and other income. We do not sell annuities or investments.

Tax projection: We estimate the 2026 and 2027 federal and state tax for cash, rollover, partial rollover and Roth conversion choices, and the effect on Medicare IRMAA and Social Security taxation.

Rollover and withholding: We help set up direct rollovers, avoid 60-day rollover mistakes, and plan withholding and estimated payments.

Cross-border retirees: For clients moving to or from China or holding a green card, we review residency, Form W-8BEN, treaty pension rules and foreign reporting.

YCL Accounting & Consulting is a multistate CPA firm serving clients nationwide in English and Chinese, led by co-founder Gloria (Chenchen) Liu, CPA.

FAQ

Q: Will my monthly pension go down because rates went up?

A: No. The annuity you have earned is set by the plan formula. Higher §417(e) rates generally reduce only the lump sum and certain other accelerated forms.

Q: Does every plan switch to the new rates on January 1, 2027?

A: Not always. It depends on the plan's stability period and lookback month. Calendar-year plans usually switch on January 1, but plans that use a plan-year, quarterly or monthly period change on different dates.

Q: Is taking the lump sum before the end of 2026 always better?

A: Not necessarily. A bigger 2026 lump sum may be offset by benefits you would earn by working longer, early retirement subsidies, health coverage, or the guaranteed lifetime income of an annuity. Compare all of these before you decide.

Q: Can I avoid the 20% withholding?

A: Yes, by choosing a direct rollover to an IRA or another eligible plan. If the plan pays you and you roll it over within 60 days, you must make up the 20% withheld from other funds to roll over the full amount.

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YCL Accounting & Consulting (YCL Tax, Accounting & Advisory)

Multistate CPA firm serving clients nationwide

Website: yclcpa.com | Email: info@yclcpa.com

Phone: 919-802-8376 / 980-202-0666 | WeChat: YCLUSA

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Book a Free Consultation with co-founder Gloria (Chenchen) Liu, CPA.

Disclaimer

This article is general tax information, not tax, legal, investment or retirement advice for any person, and it does not promise any tax outcome, benefit amount or IRS position, or recommend any annuity or investment. It is based on IRS Notice 2026-65, the IRS "Minimum present value segment rates" table, Notice 2026-27 (IRB 2026-21), Internal Revenue Code §§417, 402(c), 3405(c) and 72(t), and Treas. Reg. §1.417(e)-1. Each plan's terms control its lump-sum calculation. Rates for later months were not published when this article was written. Check your plan's official quote and the latest IRS guidance, and consult a licensed professional.