The alternative form of annuity, also called the retirement lump-sum option, at one time was one of the standard retirement options and was widely used. Due to a series of budget measures that limited the option, the lump-sum now is available only to those suffering from a medical condition that is expected to take your life within two years.

The option allows you to receive in a lump-sum the entire amount of your retirement contributions. Your annuity will then be actuarially reduced using a “present value” formula. The formula is based on standard life expectancy at the age at which you retire, even though the money is being paid out only because you have a relatively short life expectancy. The result is an overall annuity package that matches what you would have received had you retired in the usual way, living out a normal life expectancy for someone your age.

OPM has published a list of medical conditions that are automatically qualifying for the alternative form of annuity, when supported by medical documentation. Other conditions are considered on a case by case basis. Contact your personnel office for a copy of the latest list.

If you are eligible to receive the option when you retire and elect one, any unpaid redeposit and most deposits for service that you owed at that time are deemed to have been paid.

If you receive the lump-sum and do not die within the two years, you are not obligated to repay it.

Election of the lump-sum option also changes the tax status of an annuity. While the lump-sum itself is not taxed on the basis that it is a return of already-taxed money, the annuity payout is fully taxable immediately; standard annuities are mostly taxable, with the portion of the individual’s contribution not taxable.