Difference Between Annuity and Pension

An annuity is an option in which periodic withdrawals are made. It is an agreement made between the investor and the third party where the investor pays the entire amount to the company and receives an installment amount once the retirement age has reached. Thus, the annuity provides a steady income once the retirement age is reached. Whereas, a pension is a retirement product that some companies offer their employees. It is the employer’s responsibility to create an account for its employees and maintain the payouts. When the employee retires, he/she is eligible to receive money from this pension fund.

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Annuity vs Pension (wallstreetmojo.com)

  • Annuities are insurance products designed to provide investors with an income stream. There are annuities which also offer death benefits and provides the beneficiaries with the pre-decided amount in case of sudden death before the end of the tenure. Annuities can be brought with the money held in the taxable account. Annuities can be jointly owned.The pension fund is a pool of money contributed by the employer. This money is then invested and paid to the employees whose-ratio retire. This payment from the employers is termed as Pension.The department receives the amount based on the age of service, age, and salary. The option of either getting a lump sum amount or monthly payments is given to employees. Privately held companies do not usually offer pensions but are generally favored for government organizations.

Annuity vs. Pension Infographics

Let’s see the top differences between Annuity vs. Pension along with infographics.

Key Differences

  • The most important difference is about control. Annuities are voluntary, and an investor purchases the scheme after reviewing the options. On the other hand, investing in a pension fund does not provide any choice and is decided by the employer. No one has control over these fundsAnother key difference is how they are protected. Annuities are not backed by the government but are guaranteed max by the state government in which the company is doing businessBoth these options are retirement funds and provide income for life. Both annuity and pension funds provide a tax advantageTax AdvantageTax Advantage are the types of investments or saving plans that benefit tax exemption, deferred tax, and other tax benefits. Examples include Government bonds, Annuities, Retirement Plans. read more, although these advantages are different. Pensions lower income tax as this amount is deducted from the salary. Annuities are purchased with after-tax incomeAfter-tax IncomeAfter-Tax Income is the amount of income left after deducting all the direct taxes levied by the respective country’s Government, i.e., the amount left for an individual or company’s personal disposal. read more. Taxes on subsidies are not paid until earnings are

Annuity vs. Pension Comparative Table

Types

#1 – Annuity

Following are the main types of an annuity –

#1 – Fixed Annuities

These annuities are not affected by changes in interest rates or market fluctuations and are thus the safest types of annuities. Types of fixed annuities are immediate annuity and deferred annuity. In an immediate annuity, the investor receives payments as soon as he makes the first investment. In a deferred annuity, the money is accumulated for a predetermined period before the prices begin

#2 – Variable AnnuitiesVariable AnnuitiesA variable annuity is a contract between a person and the insurance company and also serves as a tax-saving investment with the insurer, which has multiple benefits with regards to the periodic payments at the time of retirement and also the death benefit to the beneficiary in case the person dies before the expiry of the contract.read more

These annuities, as the name suggests, are variable and allow investors to generate a high rate of returns by investing in equity or bonds. Income will depend on the performance of these assets. It is meant for investors who are ready to take risks.

#2 – Pension

Following are the main types of Pension

#1 – Defined Benefit Plan

In a defined benefit plan, the employer is responsible for making all the investment decisions and ensuring that there are sufficient funds available to pay for future pension plans. If there is a shortfall for funds, then the employer must pay the difference

#2 – Defined Contribution Plan 

Financial institutions manage these plans on behalf of the employer. This plan will guarantee contribution but will not guarantee the income you will receive in retirement

Final Thoughts

To opt for a pension or for an annuity is dependent on the individual’s financial position. If you consider taking pension payments, then you may not have to go through the procedure of selecting the right fund. If your employer does not offer a pension, then investing money in an annuity may be the way for you to earn some retirement income.

This article has been a guide to Annuity vs. Pension. Here we discuss the top differences between Annuity and Pension along with infographics and a comparison table. You may also have a look at the following articles –

  • Deferred Annuity FormulaAnnuity vs. Lump SumAccrual vs. ProvisionDifferences Between Price and Cost