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

Shawn Plummer

CEO, The Annuity Expert

As you approach retirement age, one of the critical decisions you must make is how to receive your retirement benefits. Two standard options are annuity and pension plans. Many ask the question, is a pension the same as an annuity? However, these plans offer different benefits and risks, making deciding which is best for you challenging. This annuity vs. pension plan comparison will explore the differences between annuity and pension plans and help you decide which is correct.

Confused About Annuities?

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Understanding Annuities

An annuity is a financial product that provides a guaranteed income stream over a set period. Insurance companies typically offer it, which can be purchased with a lump sum payment. The income received from an annuity can be paid out over the annuitant’s lifetime or for a set period. In addition, the payments received from an annuity can be fixed or variable, depending on the type purchased.

Annuity Vs Pension

Types of Annuities

There are several types of annuities available, including fixed annuities, variable annuities, indexed annuities, and immediate annuities. Each type of annuity offers different benefits and risks, depending on the individual’s financial goals and risk tolerance.

Benefits of Annuities

Annuities provide a guaranteed income stream for a set period, which can provide financial security in retirement. Additionally, annuities can offer tax-deferred growth, meaning that the money invested in the annuity grows tax-free until withdrawals are made.

Which Has Been Around Longer? Annuities Or Pensions?

Annuities have existed since Roman times, originating over 2,000 years ago with “annua,” annual payments made for life. Pensions, in some form, can be traced back to ancient Roman soldiers receiving compensation for their service. However, modern state-sponsored pension systems began in the late 19th century, with Germany introducing the first comprehensive system in 1889 under Chancellor Otto von Bismarck.

Annuity vs. Pension

When deciding between an annuity and a pension, it is essential to consider several factors, including the individual’s financial goals, risk tolerance, and retirement needs.

Benefits of Annuities vs. Pensions

Annuities offer flexibility in terms of payout options and can provide tax-deferred growth. In contrast, pensions offer a guaranteed income stream and are typically funded by both the employer and the employee.

Risks of Annuities vs. Pensions

Annuities carry the risk of the insurance company’s solvency and potential fees, while pensions can be impacted by the employer’s financial stability and economic changes.

Pension Vs Annuity

Advantages of Rolling Pension Lump Sum into a Deferred Annuity with a Lifetime Income Rider

Many can choose between a lump sum payout or a lifetime income stream from an annuity. While both options have pros and cons, rolling the pension lump sum payout to a new deferred annuity with a lifetime income rider can be more beneficial than the pension annuity payout.

Growth Potential

Firstly, a deferred annuity with a lifetime income rider can provide a guaranteed income stream for life, similar to a pension payout, providing peace of mind and financial security in retirement. However, unlike a pension annuity payout, which is typically fixed, an annuity with a lifetime income rider allows for potential growth and can keep up with inflation, ensuring that the annuity’s value retains its value over time.

More Flexibility

Secondly, rolling the pension lump sum payout to a new deferred annuity allows for greater flexibility regarding when and how the income stream is received. With a pension annuity payout, the income stream typically starts immediately and is fixed for life, which can be limiting for those who want more control over their retirement income. In contrast, a deferred annuity allows you to delay the start of the income stream until a later date, which can be helpful if you plan to work or have other sources of retirement income in the near term.


A deferred annuity with a lifetime income rider can also offer tax benefits. The annuity’s growth is tax-deferred until the income stream begins, which can help maximize the growth potential of the investment. Furthermore, a portion of the income stream received from the annuity may be considered a return of principal, which can reduce the tax liability of the annuitant.

More Control

Additionally, rolling the pension lump sum payout to a new deferred annuity with a lifetime income rider allows for greater control over the investment. An annuity with a lifetime income rider can offer various investment options, including fixed or variable, allowing investors to choose the option that best fits their risk tolerance and investment goals.

A Death Benefit For Beneficiaries

Finally, annuities typically come with a death benefit, which can provide financial security for loved ones in the event of the annuitant’s passing.

Difference Between Annuity And Pension

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 fixed period of time, while others provide payments for as long as the annuitant lives. Some annuities offer variable payouts, meaning the amount received yearly can fluctuate based on investment performance.

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

Difference Between Pension And Annuity

Pension Payouts Options

Pension plans utilize annuities to distribute 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. 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 toward 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 the owner’s and the owner’s spouse’s 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 income stream besides their 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.


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 A 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.

Note: You can purchase an annuity (with no tax penalties) with your pension lump-sum payout.

Next Steps

Deciding between an annuity and a pension can be challenging, and it is essential to consider all factors before making a decision. For example, annuities offer flexibility and tax-deferred growth, while pensions offer a guaranteed income stream and are typically funded by both the employer and employee. Therefore, it is essential to carefully evaluate each option and consider individual financial goals, risk tolerance, and retirement needs before deciding. Seeking our advice can also help ensure you make the best decision for your financial situation.

Is An Annuity The Same As A 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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