What Is the Difference Between a Pension and an Annuity?

Hey, it’s Stan The Annuity Man here, wearing a very snazzy Nike jacket with the Stan The Annuity Man logo, and a matching logo hat. I know what you think: “That's a little much, over the top." Exactly. I don’t want you to forget who I am. And who am I? I am America’s Annuity Agent, licensed in all 50 states. Now, enough about me. Let's talk about you.

Today’s topic: What’s the difference between a pension and an annuity? Is a pension the same as an annuity? We’re going to explore that. The short answer is because I know you want it, but there’s not much difference. They’re both lifetime income guarantees. But let’s dig deeper into that. Stay tuned for a little musical interlude. I’ll be walking toward a whiteboard to compare pensions and annuities side-by-side so you can better understand the differences.

Pensions vs. Annuities

Let’s head to the whiteboard. Here we have your pension, if you’re fortunate enough to have one, and here is the annuity. For this discussion, we’ll focus on Single Premium Immediate Annuities (SPIAs). A SPIA is a lifetime income stream based on your life expectancy when you begin the payments. Most people buy immediate annuities for immediate income. So, let’s compare pensions and annuities side by side.

1. Lifetime Income Guarantees: Both pensions and annuities provide lifetime income guarantees. This means you’ll never outlive your income, regardless of how long you live.
2. Backing the Income:
3. For pensions, the company backing the pension guarantees the income.
4. For annuities, the carrier (the insurance company) and the state guaranty fund back it. To find out the details about your state, visit nolhga.com. They provide information on the limitations of the state guaranty fund.

Pension vs. Annuity: Flexibility

Another difference is how pensions and annuities structure payouts.

• Pensions typically offer limited payout options—often just life only or joint life. The choices are somewhat constrained.
• Annuities, on the other hand, offer far more flexibility. You can structure the payout in various ways: joint life, life only, life with cash refund, and more.

So, in this aspect, annuities have more flexibility than pensions.

Pension Buyouts and Transfers

I had a call the other day from a client who was offered a buyout from his company but was also given the option for a pension payout. He asked me, “Which is better, Stan?” I said, “Give me the numbers, and we’ll run a comparison quote.” If that happens to you, reach out and say, “Stan, I’m getting this pension offer, can you quote all carriers and beat it?”

Here’s what I’ve found over the years: 90% or more of the time, the pension offer from the company is higher than the street offering. Why is that? It’s simple. Companies prefer to pay you an income for life rather than send you a lump sum. Their immediate annuity quote is usually higher than you’d get elsewhere because they offer guaranteed lifetime income.

Comparing Social Security, Pensions, and Annuities

Let’s compare pensions, Social Security, and Single Premium Immediate Annuities (SPIAs). All three are essentially lifetime income streams:

• Social Security: Backed by the government.
• Pensions: Backed by the company.
• Annuities: Backed by the insurance carrier and state guarantee funds.

The older you are, the higher your payment will be for all three. This is because the payment amount is based on your life expectancy. Each option has its own Claims-Paying Ability: Social Security is backed by the government, pensions are supported by the company offering them, and the insurance carrier backs annuities.

Pensions: Evaluating Claims Paying Ability

If you're looking at whether to take a pension payment or an annuity payment, the key factor is the Claims Paying Ability of the company offering the pension. This doesn't mean you need to panic, but you need to do your due diligence. There have been situations where companies have struggled to meet their obligations, especially in cases involving acquisitions. However, if you’re with a large, stable company, they’re likely to back up the pension payment because it’s bad PR if they don’t.

In the world where you buy an annuity for what it will do, not what it might do, always look for the highest contractual guarantee. If the pension is offering that and beats the quotes you receive from us, then taking the pension might be your best option. But always remember: Will do, not might do.

Immediate Annuities and Pensions

Since we’ve discussed immediate annuities a lot, I encourage you to check out this video: What is a Single Premium Immediate Annuity? This is the product most pensions are compared to. A company pension is very similar to a Single Premium Immediate Annuity payment coming from an annuity company.