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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 –
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 –
Given below are the key benefits of pension –
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.
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.
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 –
The following are the benefits of a retirement annuity –
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.
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|
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 –
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.
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