Pension vs. Annuity

What Is an Annuity?

An annuity is an insurance product you get by signing a contract with an insurance company. You purchase the contract for a certain amount of money, which you will fund through either one lump-sum or periodic payments. The insurer will invest your money in mutual funds, stocks or bonds. When you retire (or sooner, depending on your contract) you can start to receive regular payments from your annuity.

Exactly when you start receivingd payments (immediately versus at a later date), how long the payments last (for a set number of years versus until your death) and how much you receive per payment will all depend on your specific agreement.

Advantages of Annuities

In the pension vs. annuity debate, a big advantage of annuities is that you are the one who opens an annuity. You decide how much money to put in and you choose the exact contract that you sign. You have the ability to dictate what your payments look like.

For example, people who are worried about outliving their retirement funds can open an annuity that lasts until their death. Keep in mind that an annuity only pays you the money that you put in plus reasonable growth that money experiences from investing. You can also use an annuity to help your family fund expenses incurred from your death.

If you fund your annuity with after-tax money, you will not have to pay income tax when you receive that money later as a monthly payment. This provides a similar benefit to Roth IRAs.

A fixed annuity is a type of insurance contract that promises to pay the buyer a specific, guaranteed interest rate on their contributions to the account. By contrast, a variable annuity pays interest that can fluctuate based on the performance of an investment portfolio chosen by the account's owner. Fixed annuities are often used in retirement planning.