Employee benefits help employers attract and retain skilled workers without necessarily offering higher wages. One type of benefit that many employers offer is a means of saving for retirement. Employer-sponsored pensions and supplemental retirement annuities are two of the options available to employers and employees. Each has its own benefits and limitations for both employer and employees.
Employer-sponsored pension plans and supplemental retirement annuities have several basic similarities, but different structures. Both help provide income during retirement; however, pension plans are pools of funds that employers administer to provide pension payments for all of their eligible retirees. Supplementary retirement annuities, which are optional and exist to augment workers' pensions, apply only to the specific workers who own and contribute to them.
From an employer's point of view, the cost of contributing to a worker's retirement plan is among the biggest differences between a pension and a supplemental annuity. Employers who choose to sponsor pension plans may require employees who participate to submit to paycheck withholdings. Employers add to these funds, or cover the cost of contributions entirely on their own. Supplemental retirement annuities rely entirely on paycheck withholdings, which employers administer but individual workers pay.
Supplemental retirement annuities and pensions each have several options for employees who use them to choose from. Pensions can pay out lump sum benefits at the time a worker retires or ongoing payments, which are also known as annuities. A supplemental retirement annuity makes its payments over time, either for a specified duration, or for the lifetime of the retiree. Workers can also choose to invest in their own retirement annuities with the money they earn, removing the need for any employer sponsorship, and providing an outside means of supplementing retirement income.
When employees contribute to their own employer-sponsored pensions they receive less taxable income. Tax on this income is deferred until the money is withdrawn, which reduces the tax liability for the retiree. Supplemental retirement annuities provide the same tax savings when workers contribute to them through an employer with pretax income. Workers who purchase their own supplemental annuities buy them with income that is already taxed. This means that only the interest they earn is taxable at the time of disbursement. Both supplemental retirement annuities and employer-sponsored pensions are subject to additional tax penalties when users withdraw funds before they reach age 59 1/2.
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