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What's the Difference Between a Pension and Annuity? Explain the Differences Between Pensions and Annuities.

What is the Difference between a Pension and an Annuity?

The terms “pension” and “annuity” are often used interchangeably. Indeed “annuity” is in its literal sense a generic term and as such a pension could legitimately be said to be a form of annuity.

Nevertheless in the commonly understood sense of both terms there is an essential difference between a pension and an annuity, and that is in the manner in which your investment is repaid to you. So what is the difference between a pension and an annuity?

The essence of a pension is that one pays into it at regular intervals, either as a fixed proportion of one’s weekly or monthly pay (with an occupational pension) or directly as part of a contract or agreement (in the case of a private pension) and becomes eligible to receive a fixed amount upon reaching a certain stated age.

An annuity however, at least in the large majority of cases, is where a sum of money is paid in all at once and is allocated back to the policy holder in increments. The annuity is usually payable for the lifetime of the policy holder, and sometimes beyond when continued payment is made to the spouse, partner or next of kin.

Rather than being antithetical, often a pension and an annuity will work in tandem. A lump sum received as a pension can be turned into an annuity, giving the person concerned the peace of mind of knowing that he or she will receive a regular payment irrespective of longevity, based upon an estimate of how long that person is expected to live.

One of the pleasing ironies attached to the annuity is that in financial terms it pays to be overweight, a smoker and a drinker with every genetic ailment known to man and a penchant for fried chicken, fast food and fast cars. This is because the amount you will receive with each increment will depend upon how long it is anticipated that you will live.

As has already been stated, not all annuities are the same. The primary difference is between those policies that expire upon the death of the annuitant, and those that continue to pay a stipend to the annuitant’s dependents. Which of the two one opts for depends entirely upon one’s own personal situation – whether one is single or married and, if the latter, whether one’s spouse has his or her own independent means.

Peace of mind in one’s old age is what is the difference between a pension and an annuity. Compare pension and annuities providers at the above websites and start your own pension or annuity search today.

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