Are pension plans and retirement annuities the same thing? (2024)

FAQs

Are pension plans and retirement annuities the same thing? ›

The main difference lies in the nature of each product: a pension plan is a saving and investment product, and a retirement annuity is an insurance contract. Let's focus on three practical questions that spell out their differences even further.

Pensions and annuities are different retirement income options. Pensions are typically funded by your employer, while annuities are insurance products you purchase. With a pension, you may receive a lump sum or an annuity, meaning you'll receive regular payments for life.

The main difference between pension or provident funds and retirement annuities, is that in a retirement annuity, the investor owns the investment in their own right and membership is not tied to their employment status.

A retiring employee will have control and responsibility over the money in the 401(k). A pension plan is primarily funded by the employer. Employees may be allowed or required to contribute. A retiring employee who has a pension will begin receiving a fixed regular payment for life.

Both are tax-advantaged, in that investments made through each grow tax-free until they're withdrawn in retirement. But while an annuity is a type of insurance contract that's an investment itself, an employer-sponsored 401(k) is a special kind of account that holds a variety of investments.

What is an annuity? An annuity provides you with a regular guaranteed income in retirement. You can buy an annuity with some or all of your pension pot. It pays income either for life or for an agreed number of years.

If you purchase a deferred income annuity, your payments will begin anytime from two to 40 years in the future. As with a single-premium immediate annuity, you can choose to receive your income payments monthly, quarterly, semiannually, or annually.

When you retire and your RA (Retirement Annuity) matures, you can withdraw a maximum of 1/3 of it as a lump sum. We asked an expert what options you have with this lump-sum amount to secure your finances into retirement.

If the total value of your paid-up benefit in the fund is less than R15 000, you can withdraw your benefit as a lump sum before you turn 55.

If you retire, you can only cash out up to one third of the money in your pension fund. The balance will be paid as fixed sum of money monthly.

Does a pension count as a retirement plan? ›

A pension plan (also referred to as a defined benefit plan) is a retirement account that is sponsored and funded by your employer. It's based on a formula that includes factors such as your salary, age, and the number of years you have worked at your company.

Traditional pension plans have been on the decline, primarily due to the economic strain they place on companies. Employers often bear the heavy responsibility of fully funding these plans; a task made more challenging by unpredictable market volatility and fluctuating investment returns.

A good retirement strategy is to contribute to a variety of retirement investments, including 401(k)s and IRAs—even if you have a pension.

Investing $100,000 in an annuity can offer a sense of security. Based on current annuity rates, this investment might yield a monthly income in the ballpark of $500 to $600.

You should not buy an annuity if Social Security or pension benefits cover all of your regular expenses, you're in below average health, or you are seeking high risk in your investments.

Key Takeaways. Pension payments are made for the rest of your life, no matter how long you live. Lump-sum payments allow you to immediately spend or invest your pension as you like. People who take a lump sum may outlive the payment, while traditional pension payments continue until death.

Earned income does not include amounts such as pensions and annuities, welfare benefits, unemployment compensation, worker's compensation benefits, or social security benefits.

You can: take a pension annuity and receiving a monthly check; or, if your employer allows, take a lump-sum distribution, which you will need to invest and manage: lump sums can be rolled into an IRA, where you are taxed only on money you decide to take out.