Pension vs AnnuityDifferences You Need to Know Between the Two!

Written By:
Adiste Mae

Difference Between Pension vs Annuity

Pension and Annuity are both retirement plans that a person pays, or a person’s employer pays on behalf of the employee.

There are many retirement plans available in the market, depending on the risk tolerance, investment goals, and time horizon that a person has, one can choose the best options for them. 

Pension

Pension is the money that a person receives regularly upon retirement.

A normal practice regarding funding pension plans is for employers to maintain the funds on behalf of their employees.

Each time an employee receives his or her paycheck, a certain percentage of their gross income is already taken by the employer and is deposited into an investment plan. 

For the employee to receive a pension when they retire, an agreement need not be signed with the employer for he or she will automatically receive it upon retirement.

Essentially, a pension is a long-term retirement plan for an employee where an employee regularly pays towards the funds as long as he or she is employed. 

Annuity

Annuity refers to making regular payments or a lump sum amount to insurance products for the duration of the asset’s term.

Unlike a pension, an agreement is signed with an insurance company for annuities. 

For the insurance product to earn money, insurance companies invest the money towards mutual funds, bonds, or stocks.

According to the contract signed for the insurance product, a person will receive regular payments from the annuity. 

Key Differences Between Pension vs Annuity

Both pensions and annuities are saving tools that an individual undertakes.

Here are the key differences between the two:

Meaning

A Pension is a retirement fund where an employer makes regular payment transfers to the employee’s retirement fund prior to releasing the salary of the employee.

An Annuity is an insurance product a person purchases from an insurance company and either pays regular payments for the duration of the contract or a lump sum amount.  

Benefit Amount

The amount of pension is determined by the total contribution that an employee makes throughout their service while the amount of annuity will depend on the contract amount that an individual agrees to pay. 

Benefits

Upon the retirement of an employee, the individual will start to receive the benefits from the retirement fund.

This condition is not required for a person to start receiving financial benefits from annuities. 

Payment Options

A person will receive the proceeds from the annuity based on the signed contract.

For pensions, the retired employee can either receive the retirement fund as a lump sum amount or regular payments. 

Who Offers Each Type

Pensions through retirement funds are offered by employers while annuities are offered by insurance companies through their insurance products. 

Types

Pension funds are either private or public funds.

Annuities, on the other hand, can either be a Deferred Annuity, Variable Annuity, Fixed Annuity, or Single Premium Immediate Annuity. 

Conclusion

A pension fund is easier to manage because employees do not have to manage the funds – it is done by employers, however, there is lesser transparency because an employee does not oversee it regularly. 

Where an employer opens the pension fund of an employee, the annuities are the initiative of the person, personally transacting with insurance companies and making payments towards the asset. 

Retirement plans or pension funds contain the total amount of money invested by an employee for the entire duration of their employment.

Annuities, a financial asset that a person funds, are invested by insurance companies and therefore earn interest income.

But because it is managed by insurance companies, there are fees and charges deducted from the total fund when it matures.