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Pensions and Annuities: What You Need To Know

What Is The Difference Between A Pension And An Annuity

So the question is, what's the difference between a pension and an annuity? Is a pension the same as an annuity? We're going to go into that. Short answer is they're both lifetime income guarantees, but let's dig further and do a side-by-side comparison of pensions and annuities so you can understand what's out there.

If we're talking about pensions and annuities, we're probably talking about single premium immediate annuities, which we'll just put SPIA. And what that is, is a lifetime income stream based on your life expectancy at the time you take the payment. But most people buy immediate annuities for immediate income. Both Pensions and Annuities have lifetime income guarantees but the claims paying ability of that company is backing of the pension. With the annuity, it's the carrier that's backing it, and the State Guarantee Fund. Your must first find out what your State Guarantee Fund limitations are so you can structure it so that everything's covered.

In addition, typically pensions allow you to set it up either life or joint life, and they have limited choices on how you can structure the payout whereas annuity is unlimited. You can structure it any way you want, joint life, life only, life with cash refund. But pensions are typically limited on all of that.

Another thing you have to know about pensions is sometimes you can get offered a pension payout from the company where they either give you a lump sum or a pension payout. If this happens to you, call me so we can do a comparison quote. I'll tell you this, 90% or more of the time that we've found in the past few years, the pension offer from the company is higher than the street offering. The reason is the company would rather pay you out for life than come up with a lump sum and send it to you.

If the pension is offering the highest guarantee compared to quoting the street for annuities, then you have to choose that pension

Another correlation would be social security. If you look at pensions, social security, and single premium immediate annuities, they all pretty much function the same. The older you are, the higher the payment, because it's all based on life expectancy. All three will pay a lifetime income stream. A claims paying ability social security is the government. Claims paying ability of the annuity is the carrier. Claims paying ability of the pension is the company that is backing up that payment. So from the standpoint of the pension, I think that's your true risk if you're looking at, should I take the pension payment as opposed to the annuity payment?

What you need to do is look at the claims paying ability of that company to make sure that you think they have longevity. If you're with a large company, that company is probably going to fully back up that guarantee because it's bad PR if they don't. And in the world that I live where you buy an annuity for what it will do not what it might do, you're always looking for the highest contractual guarantee on the planet. If the pension is offering the highest guarantee compared to quoting the street for annuities, then you have to choose that pension. So with that being said, always remember, will do not, might do.

Never forget to live in the 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.