Many federal workers who are considering taking lump-sum pension payments when they retire are getting bum tax advice that could cost them a lot of money from financial planners and even from some confused IRS personnel.

Some would-be retirees say they've been advised, both orally and in writing, that they could take their lump-sum payment and either roll it over into an individual retirement account to protect it from being taxed immediately or use income-averaging over a period of years to reduce taxes on the lump-sum payment. Other feds have managed, without any outside help, to confuse themselves.

Unfortunately, neither the lump-sum option nor the income-averaging option is available to protect the lump-sum payments from taxes. If you take it, you will be taxed on a substantial portion of the payment as regular income.

Under legislation that took effect in June 1986, federal and postal employes may, when they retire, elect one of two annuity options:A straight civil service pension based on their salary and length of service.A so-called alternative annuity. With this option the retiree agrees to take a pension based only on the government contribution to the retiree's retirement fund, in return for getting a lump-sum payment equal to his pension plan contributions. Taking this option means that the retiree gets the lump-sum payment but then gets an annuity reduced anywhere from 8 percent to 12 percent.

For the typical person retiring today, that lump-sum option is worth between $22,000 and $25,000. For long-time, high-income feds, the lump sum could be double that amount.

But Congress later tossed a couple of wrinkles into the lump-sum pension payments, which the lawmakers originally intended to be tax-free:

Wrinkle one: The payments are no longer tax-free. The Tax Reform Act required persons taking the lump-sum option to pay taxes on that part of the payment that is considered to have come from the government. That means most of the lump-sum payment -- anywhere from 85 percent to 95 percent of it -- is fully taxable as ordinary income in the same year it is withdrawn.

Wrinkle two: Workers who retire early (before age 55) will be hit with an additional 10 percent tax on lump-sum payments. On June 17, this column reported the 10 percent penalty tax was in the works. IRS officials confirmed it (and it is now official) and said the rules would be spelled out in an updated version of IRS Publication 721, called the Comprehensive Tax Guide to U.S. Retirement Benefits. Unfortunately, as the Federal Times reported this week, IRS forgot to include that important new penalty-tax information in the updated tax guide. All of that means that if you are confused, you are in good company.

So everyone taking the lump-sum option can expect to pay taxes on a major part of it, and for early retirees there will be an additional penalty tax. The situation is so complex that even some of the experts have been giving out bad advice.

So the bottom line on the lump-sum option is this: If somebody tells you about a scheme to shelter it from taxes that sounds too good to be true, it almost certainly is too good to be true.