Once you start to work, you should start planning for your retirement, and one of the critical decisions you must make is how to receive your retirement benefits. There are two standard options on how to receive your retirement benefits: annuity and pension plans. However, these retirement plans offer different benefits and risks, making deciding which one is best for you very difficult.
Surprisingly, many do not understand the difference and similarities between pension and annuity, hence the need for this article to give insights on the difference between Pension and annuity, and their similarities.
Is a Pension an Annuity?
Pension and annuity are both funding plans for retirement. While a pension is an annuity, but not all annuities are pensions.
Pension
A pension is a retirement plan provided by employers for employees in which the employees receive regular payments after retirement, literally for life.
Annuity
An annuity is a financial product that can be used for many financial planning, including retirement planning.
Annuities can be purchased from insurance companies and other financial institutions and structured in various ways. While pension is a financial contribution held in a retirement savings account managed by pension fund administrators.
Annuities is be purchased once, half annually, quarterly, monthly for a specific period of them. On the other hand, pension contributions are made monthly until the account holder retires.
While all pensions are annuities, not all annuities are pensions.
Comparison between the benefits and risks of pension and annuity will help us understand the differences between annuity and pension plans, which will help you decide which is right for you.
Benefits of Annuities Compared with Benefits of Pension
Annuities offers a guaranteed income stream for a set period of time, which can provide financial security in retirement. Annuities can offer tax-deferred growth, meaning that the money invested in the annuity grows tax-free until withdrawals are made. While earnings or increase in pension fund value is taxable.
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.
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.
Read also: Difference between Pension and Gratuity