Annuity Vs. Pension Plan: What’s the Difference? Which Is Better?

Shawn Plummer

CEO, The Annuity Expert

There are many different types of retirement plans available to workers these days. Two of the most popular are the annuity and the pension plan. Both have pros and cons, so deciding which is right for you can be challenging. This guide will discuss the critical differences between these two retirement plans. We will also help you decide which one is best for your needs.

Is A Pension An Annuity?

A pension is an annuity, but not all annuities are pensions.

  • A pension is a retirement plan offered by employers in which employees receive regular payments after retirement, typically for the rest of their lives.
  • On the other hand, an annuity is a financial product that can be used for various purposes, including retirement planning. Annuities can be purchased from insurance companies and other financial institutions and structured in various ways.

Some annuities pay out a fixed amount of money each year for a set period of time, while others provide payments for as long as the annuitant lives. Some annuities offer variable payouts, meaning the amount of money received each year can fluctuate based on investment performance.

While all pensions are annuities, not all annuities are pensions.

Pension Payouts Options

Pension plans utilize annuities to distribute an income to their retired employees. The following are typical pension payout options:

  • Life Annuities: A life annuity pension is a fixed-income contract in which an insurance company commits to paying income payments throughout the annuitant’s lifetime.
  • Joint and Survivor Annuities: A joint and survivor annuity is a life annuity (two lifetimes) that provides income to the last surviving covered individual until death.
  • Refund Annuities: A refund annuity is a contract that guarantees that a particular amount will be paid, no matter when the annuitant passes away.

Can I Move My Pension?

You can move your pension. Either roll over a retirement account into an annuity with a guaranteed lifetime withdrawal benefit or start a new flexible premium annuity with an income rider. Either way, you will know today what your retirement income will be tomorrow at any given retirement age.

Pension Vs. Annuity: Pros And Cons

pension becomes an annuity if a retiree elects the payment option (instead of the lump sum option). There are significant pros and cons when making this decision. Below is a “T-Chart” weighing both the good and the bad.

Income RiderPension Income
Guaranteed income for lifeGuaranteed income for life or fixed period
Flexibility to start/stop income streamPotential higher payouts
Potential paycheck increases for inflation.No additional fees
Costs range from no cost to 1.25% annuallyIrrevocable payments
Potential to earn interestIt cannot be surrendered; No refunds.
Future income guaranteed todayEarns approximately 1% interest annually
Can be surrendered or cashed inNo liquidity
Lump-Sum Death BenefitNo death benefit or series of payments
Help with long-term care costsIt cannot help healthcare costs
Standard liquidity

Lifetime Income Rider

An annuity with an income rider works similarly to a pension. An owner invests money towards their retirement planning, and the outcome is either a retirement income stream or a lump-sum payout.

The difference between the two retirement planning solutions is that the pension withdrawal offers an irrevocable income stream (annuity payments) for a specific period or lifetime(s) without flexibility. On the other hand, the annuity’s income rider distributes an income stream for life or both owner’s and owner’s spouse lifetimes with flexibility and liquidity.

Growth Potential

Growth potential in a pension (pension annuity rates) typically earns little to no interest after the pension income distribution phase begins. However, an annuity typically earns interest even after the retirement income distribution phase.

Layering With Social Security Benefits

Since most companies no longer offer a pension, the annuity fills that gap. So now, a retiree can layer an additional stream of income in addition to your Social Security income.

Death Benefits

If the annuity owner dies while receiving payments, the designated beneficiaries may get some or all of the money left in the annuity in a lump sum. On the other hand, a pension beneficiary receives a series of payments or no death benefit at all.

Helpful Tip: If you have a pension with a single-life-only payout, there might not be a death benefit. Compare life insurance quotes to protect your estate in case of premature death.

Flexibility

A pension plan is an annuity that distributes income via annuitization, which is irrevocable. A deferred annuity’s income rider is flexible in that the payment can be turned on or off at any time and can be canceled.

Compare The Payout Between An Annuity And Pension

Determine whether moving or staying with your pension is the right move. Our calculator below will estimate your annuity income if you move to a new annuity contract.

Next Steps

Whether you’re interested in a traditional pension or an annuity with more flexibility, we can work with you to find the right product for your needs. So contact us today for a free quote, and let us help you get on the path to a secure retirement. We look forward to hearing from you soon!

Annuity Vs. Pension

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Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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