Annuity Vs. Pension

by Mack Mitzsheva

Consumers utilize various investment vehicles when searching for ways to grow their money. These options can take the form of personal investment vehicles, such as an annuity, or investment options provided through an employer, such as a pension. An annuity and a pension have similar characteristics, but each offers a unique benefit for its owners.

Annuity

An annuity is an investment contract between an investor and a guarantor, which can be a government agency but is generally an insurance company. The annuitant -- the person taking out the annuity contract -- deposits a sum of money with the guarantor. The guarantor returns to the annuitant at fixed intervals a series of payments based on principal and interest. Annuities are guaranteed for a set period of time, either the rest of the annuitant's life or a specified number of years.

Pension

A pension is income received by an employee from an employer once the employee retires from the company. This sum is paid out to the employee in installments over a period of time or as one lump sum payment. The employer makes regular contributions to a pool of funds, called a pension fund, that is specifically set aside on behalf of the employee for this purpose and then invested into the stock market. Employers offer pensions as part of a retirement benefits package to employees.

Funding

One of the main differences between an annuity and a pension is who funds it. Annuities are funded by the annuitant, the person covered by the insurance policy upon which the annuity is based. The annuitant may determine how much, or how little, money he would like to receive in annuitized payments. Some annuities allow the annuitant to add money to the principal amount of the annuity at a later date. Pension funds are funded by the employer and the employee does not determine how much money goes into the pension fund. Although the employer does guarantee the employee will receive a certain amount upon retirement, the employer is not required to exceed that amount.

Taxes

Individual income is often subject to taxation and annuities and pensions are no exceptions to this rule. Although an annuity is issued by an insurance company, it is not an insurance policy, but is considered a tax shelter. Contributions to the annuity grow tax-deferred as long as the funds remain within the annuity. Once the funds are dispersed to the annuitant, those funds then become taxable. Payouts from a pension are considered a form of income and -- once dispersed -- are taxable to the recipient as well.

About the Author

Mack Mitzsheva is a tax lawyer, personal finance expert and the author of the forthcoming ebook, "10 Best Places to Work Online." Mitzsheva is also a social media entrepreneur with five successful sites under her belt. Always innovative, Mitzsheva is currently developing a cutting-edge budgeting app for newlyweds.

Photo Credits

  • Comstock Images/Comstock/Getty Images