Charlie Jones is retiring on Jan. 1. His company offers him a choice between a lifetime annuity or a single lump-sum payment.

Nancy Brown is changing jobs after 10 years with the same firm. She will get a lump-sum payment of her vested interest in the company retirement plan.

Sixty-year-old Oscar Svenson's boss decided to terminate the company pension plan and distribute individual interests in the accumulated funds to his employes.

Question: What do Charlie, Nancy and Oscar have in common?

Each has to make a decision on how to handle a sudden--and perhaps unexpected--chunk of money being dumped in their respective laps.

The decisions they make now will affect the size of the bite Uncle Sam's tax collectors put on the payments. And what they do now with what may be a substantial amount of money can have a major long-range impact on their financial circumstances after retirement.

Of course the Charlie, Nancy and Oscar we're talking about are not real people. But a lot of real people face similar situations.

If you're one of them, you should know what the various options are, along with the tax implications for each option.

If, like Charlie, you're about to retire, you may have a choice not available in the other two situations: accepting a retirement annuity or opting for a lump-sum payout.

The first step in this situation is to find out--from your personnel or benefits office--what kind of annuity or pension fund payout you could expect.

There may be several alternative plans, like a monthly payment for a specified number of years, or for life, or for the life of you and your spouse (whoever lives longer).

(The amount of the monthly payment, of course, will be smaller under a plan that can be expected to continue for a longer time.)

Some companies offer regular cost-of-living increases; others may increase payments from time to time on a voluntary basis. Many, however, will simply purchase a fixed annuity for you from an insurance company--a plan that will only continue the initial fixed amount for the specified period.

A relatively small number of companies manage their own pension funds. Monthly payments may change (usually once a year) to reflect the success--or failures--of their investment portfolios for the preceding year.

The idea is to compare what the company offers with what you think you could accomplish with the funds on your own. More and more people are taking a lump-sum distribution, believing that they can do better for themselves.

Providing your company offers the option of a lump-sum distribution, I think this is the better way to go--but with two big "ifs."

First, you must have--or be willing to acquire--some basic knowledge of investing and have both the time and the inclination to look after your investments. The days of "buy and forget" investing are gone; any portfolio of investments needs at least occasional review.

And second, you must have the fiscal self-discipline to resist the temptation to pull out hunks of principal for transient pleasures (unless, of course, you know you have more than you'll need for the rest of your life.)

If you elect the pension or annuity (or if you have no choice because your company doesn't offer the lump-sum option), the tax situation depends on the kind of program under which you were covered.

Payouts from a plan to which your employer made all the payments, while you made no contribution, are fully taxable when received.

But if yours was a contributory plan, the general rule is that there is no tax imposed on the part of each payment that represents a return of your own contributions. That's because you paid tax on that money the year it was earned.

The IRS has two different rules. If--counting the entire monthly payout--you can recover the full amount of your total contributions within three years, then there is no tax liability until total payments equal total contributions. From then on all the money received is taxable. (This is the situation for most federal civil service retirees.)

If you can't recover all your contributions within a three-year period, then, starting with the very first payment, a part of each payment is excluded and the balance included for tax purposes.

The amount to be excluded each month depends on such things as your total investment in the plan, the amount of annual payments and your age at retirement (which translates to life expectancy).

The excludable amount calculated at the beginning does not change. Later increases in the monthly payment (like a cost-of-living increase) are taxable in full. Payments are not reduced by some set percentage, but rather by the dollar amount computed on the first payment.

IRS Publication 575 on pension and annuity income explains the procedure and provides actuarial tables for the computations. But it's complicated; your personnel people may provide assistance, or you can ask the IRS for help.

Should you decide to take a lump-sum distribution, then there is a whole new set of rules. And now our old friends Nancy and Oscar can rejoin the discussion, because these rules are essentially the same regardless of the reason for the distribution.

The basic rule is the same as for the annuity option: Any part of a lump-sum distribution that represents a return of your own contributions is received without tax liability. But all contributions by your employer plus all accumulated earnings--including earnings on your own contributions--are subject to tax.

There are several different reporting options available to reduce the amount of tax due. If you receive a total distribution in one year, any portion attributable to your participation in the plan prior to 1974 may be treated as a long-term capital gain.

The balance--the amount attributable to post-1973 participation--is considered ordinary income. But there is a special 10-year averaging method that can be used for a substantial reduction in the tax that would otherwise be imposed.

To qualify for 10-year averaging, you must have participated in the plan for at least five years before the year of distribution. In addition, the entire distribution must be received in a single tax year. And you must account for the full distribution by this method.

Exception: You can elect either the long-term capital gains tax or the 10-year averaging method for pre-1974 contributions. There is no rule of thumb to guide you in this decision; you should work it out both ways to see which gives you the lower overall tax.

There is yet another option available for a lump-sum distribution: a rollover IRA. You can transfer the taxable part of the distribution to an Individual Retirement Account and defer all tax liability until you later withdraw funds from the IRA.

A rollover IRA is not subject to the dollar limits of regular IRAs. You can't roll over that part of a lump-sum distribution that represents a return of your own contributions to the pension plan--but that money is yours without tax anyway.

All the rest--your employer's contributions plus accumulated earnings--can be transferred without dollar restrictions and without reducing the annual ceiling on regular IRA contributions.

There are a couple of other rules. To escape tax consequences by rolling over a distribution into an IRA, you must invest the funds within 60 days after receipt.

If you receive property--say, shares of stock in your employer's company--you can roll property directly into the IRA (if you have the type of custodial account that permits this).

Or you can sell the property without having to account for gain or loss, if you deposit the proceeds into the rollover IRA.

You do not have to move the entire lump-sum distribution into an IRA. You can roll over a part of the payment and defer tax on that part. But the portion you retain will be subject to tax--and in that case you can't use either the capital gains treatment or the special 10-year averaging method.

If you want to hold on to some of the funds, you may find it pays to declare the entire amount to take advantage of one of the special tax benefits.

Because the 10-year method in particular results in a very low tax liability, you may save dollars by reporting the total distribution rather than rolling over a part and paying tax on the balance at your regular rate.

As you can see from this necessarily brief review, the handling of retirement payments and particularly of lump-sum distributions can be a pretty complicated affair.

Your employer should provide a statement (usually on IRS Form 1099R) showing the various numbers you need--the total distribution, the amount of your contributions and any amount qualifying for capital gains treatment.

In addition to IRS Publication 575, mentioned earlier, you may find Publication 590 on IRAs helpful. Both of these booklets are available free at your local IRS office or by mail from the district director.

At most IRS offices, taxpayer assistance specialists are available to answer questions or offer explanations. You may get some assistance from your personnel or benefits people. And if you're really confused, you may have to talk to an accountant or financial counselor.

In any case, it pays to do your homework thoroughly if you get--or anticipate getting--a retirement payout or a lump-sum distribution for any other reason. The right choices can make a substantial difference in the number of dollars you end up with.