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. 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.
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- Annuities are insurance products designed to provide investors with an income stream. There are annuities which also include 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.
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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 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 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
| Particulars | Annuity | Pension |
|---|---|---|
| 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 of 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 every month. |
| 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 will 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 contributes and handles the payout. No contract is required. If you are working, you will be paid pension post-retirement. No research or plan is needed. |
| Disadvantage | The procedure to select the right annuity is complicated. 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. It 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 plan and Defined benefit plan |
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 Annuities
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 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 your employer does not offer a pension, then investing money in an annuity may be the way for you to earn some retirement income.
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