The classic question. To take the money all at once or in installments over many years? Some say to take the annuity because it keeps up with inflation and is subject to lower taxation over longer periods of time. Others, on the other hand say that one should always take the lump sum and invest in so that it will yield more return than what is offered by the annuity. Which is correct?

The answer is directly dependent on the interest rate of the annuity, and not on the jackpot amount. To be clear about the annuity option, it is composed of annual payments. The annuity has a face value, which is the total amount of all the payments equaling the total prize. The money paid out over the annuity is calculated at a particular interest rate. This means that if one were to take all the money in one lump sum and deposited it in an interest bearing account for the duration of the annuity, the end result would be the same. The annuity is collecting interest, in other words, at a specific rate.

This also means that the jackpot value is the annuity value. If you were to choose the cash option you would get the money minus the interest it would have collected over the lifetime of the annuity, which can be a shocking amount. As a rule of thumb, the cash option comes out to about half the advertised jackpot prize. This means that the best way to determine which option to choose is to find out what the interest rate paid is, and whether you can beat.

The situation is compounded by other factors, such as age. This is a big determining factor that doesn’t require complex calculations to figure out. If the winner is young, then the dilemma stands, but what if the winner is of advanced age? What if the winner is unlikely to live long enough to see the end of the annuity option? Clearly the cash option is better in this case. Then again, if the annuity option offers better returns, and the winner has heirs, the decision once again becomes one of personal choice.

Taxes are the final piece of the puzzle. Tax rates can change and larger sums of money place winners in higher tax brackets. This means that a larger percentage of winnings will go toward taxes with the cash option. Conversely, the annuity option holds the inherent risk of higher taxes down the road due to tax reforms.

The decision as to whether to choose the lump sum or the annuity is not one that can be made quickly, and expert advice is highly recommended. Consult an estate planner, accountant, or tax advisor before making any decisions regarding the payout options. If you’re the big winner, you will certainly be able to afford such services.