Difference Between Pension vs Annuity
Pension and Annuity are funding scheme or plan after retirement. There are many pension schemes available in the market and all they have the same aim to help you to save money and provide you an income when you are older.
Let’s discuss Pension vs Annuity in detail.
Pension
A pension is nothing but the amount of money paid regularly to a person who has retired because of having reached a certain age. Pension fund generally maintains and created by an employer for employees. When an employee works employer makes the contribution in the pension fund and because of this employee need not worry about the saving while working. There is no need to create an agreement contract with the employer if an employee has a pension employer will pay that at retirement. So it is a long term saving plan in which person receive tax relief on the money pay into the pension account.
Annuity
An annuity is nothing but the insurance products and you will get it by signing a contract with the insurance company. In Annuity, a customer has to purchase a contract for a certain amount of money which customers will fund through either lump sum amount or periodic payments. The insurance company invests this money in a mutual fund, stock or bond to earn the income. Customer will get a regular payment from the annuity as per agreement. It is a simple investing and income vehicles which insurance company invest annuity in the stock market.
Head to Head Comparison Between Pension vs Annuity (Infographics)
Below is the top 7 difference between Pension vs Annuity
Key Differences Between Pension vs Annuity
Both Pension vs Annuity are popular choices in the market; let us discuss some of the major Difference Between Pension vs Annuity.
- An annuity is a financial scheme which will pay a set amount of cash over a defined period of time whereas pension is a retirement account which will pay cash after retirement from service.
- The pension amount is received only after retirement whereas to get annuity amount person need not to wait until retirement.
- One of the key difference is that the pension amount will depend on the total amount that person has earned during his career, whereas annuity amount depends on the amount of money investing by a person over a year.
- Annuity scheme can be purchased by any person from the insurance company, whereas a person cannot by pension, it is offered by an employer to employees as a part of an employee’s benefits.
- The person who avails pension is generally converted into a family pension after his demise whereas annuity is paid to single life and joint account holder as per agreement.
- An annuity is commonly used in the financial market whereas pension fund is not commonly used in financial markets.
- The big advantage in an annuity is that person is the one who opens an annuity whereas pension account is open by an employer and not by an employee or person.
- In pension account less transparency as compared to the annuity scheme because day to day maintenance of pension is not handled by a person.
Pension vs Annuity Comparison Table
Let’s look at the top 7 Comparison between Pension vs Annuity
| The Basis of Comparison Between Pension vs Annuity | Pension | Annuity |
| Meaning | It is a type of retirement account which is offered by companies to their employees. It is a funding scheme after retirement. It is an amount of money paid regularly to a person who has retired from work because of having reached a certain age. | It is an insurance product which an individual get after signing a contract with an insurance company. It allows individuals to set aside a fund for later use. An individual purchase a contract for a certain amount which he will fund through either lump sum payment or periodic payments. |
| Payment Amount | It is determined by the sum that one has earned during his service. | It is determined by the amount of investment made by individuals towards the Annuity scheme. |
| Financial Benefits | In a pension scheme, an individual will receive a financial benefit once they have retired from the service. | An annuity is also one of the types of pension scheme but there is no need person to get retired to avail financial benefits. |
| Payment options | When a person cashes out pension, a person has two option, one is to receive monthly pension payment and the second one is to receive the pension as a lump sum payment. | In Annuity, a person will receive cash as mentioned in contract or agreement. |
| Who offers? | The pension is offered by an employer to employees. | An annuity is sold or offered by the insurance company. |
| Leaving Legacy | In a pension, scheme individual has an option to transfer pension funds to any other person he chooses after he died. | In Annuity, a person cannot transfer money to any one of a family member unless he buys joint or any type of such guaranteed product. |
| Types | Private Pension funds and Public pension funds. | Single Premium Immediate Annuity and Deferred Annuity, Variable Annuity, Fixed Annuity. |
Conclusion – Pension vs Annuity
So from the analysis, it is clear that both pension vs annuity is a common source of income and both are beneficial to the person, however, there is a number of differences between annuity vs pension. A pension is a retirement account which is offered by the employer to an employee for the employer’s benefits and an annuity is an insurance product which a person gets by purchasing a contract. An annuity is a financial asset which pays a set amount of cash over the period of time, and pension is the benefit which person avail after they have retired (after completing the age limit) from work. The pension amount is calculated by the total money that one has earned during his career of work and that money is invested by an employer and annuity amount is calculated by the money invested by a person in the annuity account or scheme. The insurance company invests annuity money into the mutual fund, stock, and bond. The annuity has one of the potential disadvantages that it incurs additional fees and commission because the insurance company invests money in the stock market, so they charge some fees for the maintenance of money.
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