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An Overview of Pension Vs Retirement Annuity

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Retirement annuities and pension plans are the two most common sources of post-retirement income. While the two serve the same purpose, they differ in terms of the features and benefits offered. The suitable alternative for you, however, will depend on your circumstances and requirements.

To help you get better clarity about the key differences between the two, this article will offer insights into what a pension and retirement annuity is and an overview of a pension vs retirement annuity.

Before diving further into pension vs retirement annuity, let’s cover the basics first –

What is Pension?

A pension is a retirement account that most companies create for their employees. The employer here maintains the funds in this account. Once an employee retires, they can start receiving their payouts. The amount that they receive as pension depends on their age, employment tenure, and salary.

You can receive your pension in two ways –

  • Monthly Payments – The monthly payouts are a regular income source post-retirement
  • Lumpsum Payment – This payout gives you access to your retirement fund at once and enables you to manage it the way you want

Benefits of Pension

Given below are the key benefits of pension –

  • Automatic Savings – One of the notable advantages of a pension is that it is generated while you are working. It is maintained by your employer and frees you from worrying about your savings for the future while you work.
  • Easy to Receive the Benefits – With your company’s pension account, you don’t have to worry about framing a contract or agreement with your employer. If you have opted for a pension, you will receive the money once you retire.

In this case, you would not be required to research, choose plans, or connect with the bank. You will directly receive the funds once you retire from your job. 

How Does Pension Work?

As both an investment and long-run saving product, a pension account is usually maintained by an employer. Once the employee retires, they start to receive the savings that they managed to create while working with the company or by paying a portion of the salary. The funds can be received either in one go or as a monthly payout.

What is Retirement Annuity?

Under a retirement annuity plan, you pay a lumpsum amount during the collection period to obtain regular payment for a lifetime or a predetermined period. A retirement annuity is a suitable plan for people who want to ensure the fulfilment of their retirement requirements and the availability of sufficient funds to survive their retirement years.

Some of the features of a retirement annuity plan are –

  • It enables you to save for the future by employing a safe investment mechanism
  • When you opt for a retirement annuity, you have the flexibility to select the payout option as per your requirements
  • Your financial security begins the moment you start investing in a retirement annuity plan

Benefits of Retirement Annuity

The following are the benefits of a retirement annuity –

  • Income Source – Most retirement annuity plans serve as a lifetime income source. The regular payout here ensures that your financial condition does not change significantly despite the absence of regular monthly income.
  • Offers Financial Protection against Inflation – A retirement annuity plan is created taking many factors into account like medical expenditures, inflation, and more. With a retirement annuity plan, you can be financially secured against the constant rise in prices.
  • Control over the Funds – Another advantage of a retirement annuity is that you have control over the retirement funds. Besides having the option to choose the payout type, you can also select the amount you want to invest and the duration.

How Does Retirement Annuity Work?

A retirement annuity plan functions the same way as your insurance policy. However, the purpose of this plan is to create savings and financially secure funds for a set tenure. You can purchase the plan either by paying the premium regularly or settling the amount in one go. You receive the sum assured and additional applicable incentives.

Pension Vs Retirement Annuity – A Tabular Overview

Here is an overview of pension vs retirement annuity –

Basis Of Comparison  Pension Retirement Annuity
Payout Pays out the funds after your retirement (either as a lump sum or regular, periodic payments) Set or predetermined amount over a pre-defined tenure – you can select as to when and how to receive this payout
The recipient Usually for employees from their employers – the payout is provided after their retirement Anyone who has purchased the scheme from an insurance company
Amount You Receive Based on the amount you have earned as part of your salary package during your employment tenure Depends on the amount put in by an individual over a period
Transparency As the accounts are handled by the employers, there is lower transparency compared to annuity plans More transparent as the investor is responsible to manage the funds
When Do You Receive Your Financial Benefits Once you retire from your service Even if you have not retired already
Who Manages the Plans The employers The investor manages the plan by contributing to the account

Pension Vs Retirement Annuity – What to Choose?

As we have seen so far, both pension and retirement annuity plans are great income sources after retirement. Your choice in terms of pension vs retirement annuity, thus, would primarily depend on the following questions –

  • What are your financial goals?
  • What are your financial requirements?

Answering these two questions will help you plan your retirement budget. If you have sufficient funds to cover your post-retirement life, pension payments can be a suitable choice to create extra income. Retirement annuity, on the other hand, is appropriate for those who don’t have enough funds to cover their post-retirement expenses.

Key Takeaways

  • Retirement annuity and pension plans are the two most common sources of income post-retirement. A pension is a retirement account that most companies create (and maintain funds in) for their employees. Once an employee retires, they can begin receiving their payouts.
  • Under a retirement annuity plan, you pay a lumpsum amount during the collection period to obtain regular payment for a lifetime or a predetermined period. A retirement annuity is a suitable plan for individuals who want to ensure that their retirement requirements are met and that there are sufficient funds available to survive their retirement years.
  • When it comes to pension vs retirement annuity, a pension plan pays out the fund after your retirement. It can be either lumpsum or regular, periodic payments. A retirement annuity, on the other hand, offers a predetermined amount over a set period. You have the option to select when and how you wish to receive this payment.
  • Pension plans are usually less transparent than retirement annuity plans. This is so because retirement annuity plans are maintained by the investors while the pension plan is funded and handled by the employer.
  • If you have enough funds to cover your post-retirement life, pension payments are suitable to create extra income. Retirement annuity is appropriate for those who do not have enough funds to cover their post-retirement expenses.

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