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What Is a Pension Annuity and How Does It Work?

Stan Haithcock
December 4, 2023
What Is a Pension Annuity and How Does It Work?

What is a pension annuity and how does it work? Can you believe where you're sitting? You're sitting there doing research on annuities! Who thought it would come to this? By the way, kudos for that because you need to know what you're buying. So, let's talk about pension annuities and how they work.

‌There's not just one pension annuity. There are a couple, but the primary one you're probably thinking about is called a Single Premium Immediate Annuity, and we will dig into that very deeply. And at the end if you hang in there with me, I've written a book on Single Premium Immediate Annuities and owner's manuals on other products. You can download those for free if you hang in there, dig in, and commit to your annuity research. So, at the end of the video, I'll tell you how to get them.

‌In Roman Times

‌Okay, are you still there? You still doing your research? Good. Pension annuities are really Immediate Annuities. Let's talk about them. The actual history of Immediate Annuities is pretty cool. I'm not going to say Julius Caesar was part of it, but let's just say that for a good story. Part of the Roman Empire, they created Immediate Annuity type payments. Annua, A-N-N-U-A. In Latin, it means payment. That's where the word annuity comes from. And the dutiful Roman soldiers and their families got lifetime income stream payments from the Roman Empire. That's where it came from. So, it's been around for a long time. It's a transfer of risk where you're transferring the risk to an annuity company to pay you for the rest of your life. That's what an Immediate Annuity is.

‌Life Expectancy

‌Now, the guts, how the sausage's made, and how it all works is pretty basic. There are no moving parts and no annual fees. We can quote all companies for you based on your specific situation, but the primary pricing mechanism is your life expectancy at the time you take the payment. If it's joint life, it's life expectancies. And the unique benefit propositions, you can't outlive it. Now, you can structure it so that if you die, the money goes poof. Or if you die, the money goes to your beneficiaries. You can do either one. The benefit proposition of a pension annuity, which is an Immediate Annuity, is excellent and unique to the annuity world. You'd think that the annuity industry would say, "Hey, let's promote that." But of course, they don't. I'm working on that though. I'm going to be annuity czar with the next administration, whoever that is.

‌You might want to vote for that. Stan The annuity Man, annuity czar. Life would be a better place because people would have income streams, and they would live a better life. No, I'm not running for office. I do not want to do that.


‌So, the limitation of Immediate Annuities is that it's an irrevocable contract. Think about that water faucet beside your house. And you turn on the water faucet and the knob comes off, and water starts flowing and flowing and flowing, and there's no way to stop it. That's an Immediate Annuity once you turn on the income stream. Think of it like that. You have to make sure that what kind of money you're putting in or what you're trying to solve for the income stream is allocated properly and in proportion. Because once you turn it on, that income will hit every month until you die. And if it's joint life, it will continue for your spouse or partner's life. So, the benefits outweigh the limitations if you understand the limitations, but that's a single premium immediate annuity.

‌Deferred Income Annuity

‌On a very quick side note, a Deferred Income Annuity is a Single Premium Immediate Annuity that you defer. Now you're like, "Stan, stop. You're killing me here." Just understand that when you come to get a quote from us, you're going to tell us when you want the income stream to start. If it's a year or less, it's an Immediate Annuity. If it's a year or more, it's a Deferred Income Annuity. It's the same exact thing.

‌Client Example

‌Oh yeah, I got something for you. This happened probably two weeks ago. I get a call from a guy, and he goes, "I think I want the Immediate Annuity." We'd gone through the whole process, he downloaded the books, and we sent him the quote. We had some conversations. He says, "I think I will do this Immediate Annuity. But I'm really hung up on the fact that I can't pivot and change my mind. In other words, five years down the road, I don't need more income. I can't say stop the income; send me the money." I told him, "You know what? I actually think that's a benefit."

‌And the benefit is that once you get that lifetime income stream, you can plan around that. That's part of the income flow. That's part of your pension if you're so fortunate. Social Security, you got this annuity payment. That's part of your income flow. And if you're an investor, it actually makes you a better investor. I'll be very honest with you about that because if you don't need to start peeling off money from your other non-annuity investments and have that income flow in place, you're a better investor because you don't have to mess with those investments.

‌It's Like Buying a Plane Ticket

‌So, at the end of the conversation, he said, "You know what? That limitation is actually a benefit." I said, "Exactly, if it's allocated properly and in proportion, and you're trying to solve for a specific contractual guaranteed amount." He agreed with Stan The Annuity Man, of course. You go to Orbitz, or you go to Priceline or whoever; I probably just dated this blog because 10 years from now, those people won't be here. But for now, you buy a plane ticket and punch in where you want to go. And you don't know who the carriers are, but you see the list. Same thing with annuities.

‌We represent all carriers so that when you put in the quote, people would say, "Hey, Stan, run this quote for me. Who do you think's going to finish first?" I don't know, and I really don't care. It really comes down to the highest contractual guarantee. From there, we start breaking down claims-paying ability if you feel comfortable with that carrier. You can get a quote from us, and we'll send it to you in PDFs. You can look at it, and then we can talk about it if you want.

‌But it's like quoting, getting a plane ticket. We go out there and quote, everybody. Quotes change every seven to 10 days. It's a commoditized world and it's based on your life expectancy at the time of the payment. Some carriers want your age range at the time you quote; some don't. That's the reason we quote all carriers. So, that's how a pension annuity works. Still, I wanted to make sure that you were very clear on the quoting process and had no expectations of which carrier would pop up and be the number one for your specific situation.

‌Okay, we're at the finish line. We're here. I would encourage you to watch a video I did called Why SPIAs work. You should dig into that because I dug further and got even more into the weeds if you're still doing your annuity research.

‌Let's talk about that annuity research. You need to continue with my books as part of your research project. You can download these for free. But before I tell you how to do that and get these, hit the subscribe button on The Annuity Man YouTube channel because every day, Monday through Friday, I will put out a video for the rest of infinity. Yes, I'm a busy little boy, but I want to educate the public because one of the annuity industry's mistakes is they put out all of these products. They put out all this stuff and send out their agent army to sell whatever, but what's missing is education. What's missing is you understanding what you're going to buy before you buy it. You need to understand the limitations and the benefits, which leads us to the books.

Click this link to download all my annuity owner's manuals for free. You'll be happy, happy, happy. It will take up about an hour of your time to flip through them and understand them. If you want a quote and if you want to talk to me or someone at my company, you can always book a call with us. Thank you for joining me today. I'll see you next time.

Never forget to live in reality, not the dream, with annuities and contractual guarantees! You can use our calculators, get all six of my books for free, and most importantly book a call with me so we can discuss what works best for your specific situation.

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