Difference Between Pension and Annuity

Pension vs Annuity
 

Annuities and pensions are quite similar to one another in that they are both used for retirement purposes. However, annuities can also be taken out by any person for a number of different reasons, whereas a pension is provided by an employer solely for the purpose of retirement. Due to the similarities many mistake them to be the same. However, there are a number of differences between the two. The article offers a comprehensive explanation on each and highlights the similarities and differences between annuity and pension.

Annuity

An annuity is known as a financial asset that will periodically pay a set amount of cash over a defined period of time. An annuity is recognized as a financial contract that is made between an individual and a financial institution. The individual will pay a lump sum at the beginning of the period or make a set of deposits on a set schedule to a financial institution such as an insurance company, and the financial institution will make regular payments to the individual for a previously agreed fixed period of time. Annuities can be purchased from insurance companies for a number of different purposes. Annuities can be taken out to provide a monthly income in retirement, or for the care of a child or spouse. Annuities can be purchased by anyone who wishes to receive a guaranteed income on a periodic basis. When taking out an annuity for the purpose of retirement, the individual does not necessarily have to retire to start claiming the monthly payments. The amount that is paid as the annuity will depend solely on the value of the investment made by the individual towards the retirement annuity scheme.

There are different types of annuities, which include single life (for the life of the individual) and joint and survivor (for the life of the individual and surviving dependent). In addition, there are also certain life annuities that are usually guaranteed for a longer period of time and will be paid even if the recipient passes away. Annuities, regardless of the purpose for which they are obtained are an excellent way to secure a form of monthly income for a retiree or a dependent.

Pension

Pensions are benefits that are paid out of retirement plans that are established by companies or government departments. In simpler terms, pensions are periodic guaranteed payments that are made to retired employees of a firm or government organization. Pensions are also a type of annuity and are paid off as single life annuities or joint and survivor. The retiree can decide how they would like their pension to be structured. They can either receive the pension payments or take the entire amount as a lump sum and then get it converted to an annuity. In the event that the retiree decides to go with a lump sum payment they can decide how they would like the pension funds to be invested. They may also choose to invest a portion of it and set aside the rest to be received as monthly payments.

What is the difference between Pension and Annuity?

An annuity is known as a financial asset that will pay a set amount of cash over a defined period of time. Annuities can be obtained for a number of reasons such as to pay for a dependent (child or spouse) or for retirement purposes. Pensions, on the other hand, are only taken out for the purpose of retirement. Due to their similarities, many assume that annuities and pensions are the same. However, there are a number of differences between the two. A pension can only be obtained once the individual retires from work. On the other hand, an individual does not wait till the retirement to receive annuity payments. Another major difference is that the pension amount will depend on the total that a retiree has earned during his career; annuities will depend on the amount of the investment that has been made over the years. Annuities can be purchased by any person from an insurance firm, whereas pensions cannot be purchased and are provided by employers as a part of the employee’s benefits.

Summary:

Pension vs Annuity

• An annuity is a financial asset that will pay a set amount of cash over a defined period of time.

• An annuity is recognized as a financial contract that is made between an individual and a financial institution. Annuities can be purchased from insurance companies for a number of different purposes, one of which is retirement.

• Pensions are periodic guaranteed payments that are made to retired employees of a firm or government organization.

• Pensions are only taken out for the purpose of retirement.

• Annuities and pensions are quite similar to one another in that they are both used for retirement purposes.

• A pension can only be obtained once the individual retires from work, whereas an individual does not wait till the retirement to receive annuity payments.

• The pension amount will depend on the total that a retiree has earned during his career, whereas the annuities will depend on the amount of the investment that has been made over the years.

• Annuities can be purchased by any person from an insurance firm, whereas pensions cannot be purchased and are provided by employers as a part of the employee’s benefits.