The Difference Between Pensions and Annuities
The Annuity Man
I love speaking with people that will tell me proudly and loudly that they "hate all annuities," but really love the lifetime income stream that their pension and Social Security payments provide. Hypocrite much? Every U.S. citizen with a Social Security number owns an annuity whether they like it or not. It's called Social Security.
Pensions are lifetime income annuity guarantees offered by an employer. Yes, pensions are annuities as well. The employer is on the hook to pay regardless of how long you live. With annuities, the annuity carrier (i.e. life insurance company) is on the hook to pay for the rest of your life.
The primary difference between pensions and annuities is the backing of the payments. Pensions are backed by the claims paying ability of the employer (private or public sector). In addition, the PBGC (Pension Benefit Guaranty Corporation) offers additional backing in case the employer goes under or can't pay. Annuity income streams are backed by the issuing annuity company/life insurance company. Because fixed annuities are regulated at the state level, each state has a guaranty fund that backs policies to a specific dollar amount.
Both pension and annuity lifetime income streams are primarily based on your life expectancy(s) at the time the payments start. Interest rates play a secondary pricing role.
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