Difference Between Annuity and Pension
Annuity refers to the contract for receiving the regular payments after a certain period of time from an insurance company as per the agreement/contract entered whereas pension is fixed benefit received on monthly basis on retirement where an employee has contributed to pension fund maintained by employer during his term of employment.
An annuity is an option in which periodic withdrawals are made. This 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.
- Annuities are insurance products designed to provide investors with an income stream. There are annuities which also include provide 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 amount is received by the department based on the age of service, age, and salary. The option of either getting a lump sum amount or monthly payments are given to employees. Private companies do not usually offer pensions but are generally popular for government organizations.
Annuity vs Pension Infographics
Key Differences Between Annuity and Pension
- 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 funds
- Another 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 business
- Both these options are retirement funds and provide income for life. Both annuity and pension funds provide a tax advantage, although these advantages are different. Pensions lower income tax as this amount is deducted from the salary. Annuities are purchased with after-tax income. Taxes on annuities are not paid until earnings are
|Purpose||An annuity is an Insurance Product||A Pension is a Retirement Product|
|Buy||An annuity can be bought from any financial services company||The pension cannot be bought, it is usually paid to government employees|
|Meaning||An annuity can also be considered as a retirement product but one may not have to retire to avail the benefits||The pension is the benefit of receives after they have retired from their service or job|
|Calculation||An annuity is based on the amount of investment by an individual towards the scheme||The pension is calculated based on the sum of the amount earned during the service adjusted for years of service|
|Payment||Under an Annuity scheme, a person gets a lump sum amount if he has enrolled for that scheme||Under Pension a lumpsum amount is given but on a monthly basis|
|Advantages||An advantage of an annuity is that the individual selected the plan and opens it. The individual has all the right to decide the amount needed to invest and which contract you are going to sign. If the annuity is funded with post-tax money then the amount received will not be liable to pay taxes||The advantage of a pension comes when the individual is working since the employer is the one who makes the contribution and handles the payout.
No contract is required. If you are working you will be paid pension post-retirement. No research or plan is required
|Disadvantage||The procedure to select the right annuity is complex. There are various types of annuity and finding one that fits your needs may be difficult. There are additional fees and commissions incurred.||Since the employer takes care of the payment it gives less transparency to the employees. This may be a disadvantage for some|
|Guarantee||Annuities are not guaranteed||Pensions are backed by the government and are guaranteed|
|Stability||Annuities earnings may be fixed or variable. It may be affected by the interest rate or the stock market||The pension amount is fixed and is divided into monthly payments|
|Types||The annuity has two types – Fixed and Variable||Types of Pension schemes – Defined Contribution and Defined benefit|
#1 – Annuity
Following are the main types of an annuity –
#1 – Fixed Annuities
These types of 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 payments begin
#2 – Variable Annuities
These annuities as the name suggests are variable in nature and give an opportunity for investors to generate a high rate of returns by investing in equity or bonds. Income will depend on the performance of these assets. This is meant for investors who are ready to take the 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 to ensure 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
These plans are managed by financial institutions on behalf of the employer. This plan will guarantee contribution but will not guarantee the income you will receive in retirement
To opt for pension or for an annuity is dependant 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 the pension is not offered by your employer than investing money in an annuity may be the way for you to earn some retirement income.
This has been a guide to the Annuity vs Pension Here we discuss the top differences between Annuity and Pension along with infographics and comparison table. You may also have a look at the following articles –