Pension vs. Annuity: What's the Difference?

Pensions and annuities are two common sources of retirement income. However, they are quite different, and each comes with its own advantages and disadvantages. The best option for you will depend on your individual circumstances. For example, some people may choose a pension because they already have good retirement savings and prefer steady pay. Others may prefer the flexibility of annuities. When it comes to deciding between a pension vs. an annuity, it’s important to know the difference between taking your pension payments and taking your pension as a lump sum and using it to open an annuity.

If you’re unsure how to allocate your assets, consider creating a full asset allocation plan with a financial advisor.

What Is a Pension?

A pension is a retirement savings plan offered by some employers to their employees. While pensions have become less common in the private sector, they remain a standard benefit for many government employees.

Your employer sets up and manages a pension fund on your behalf. Once you retire, you become eligible to receive payouts from the fund. The exact amount you receive depends on several factors, including your age, salary and the number of years you worked for the company.

When it comes time to cash out your pension, you typically have two options:

Monthly payments. The first option is to receive monthly payments. This provides a steady and reliable source of retirement income, ideal for planning your retirement budget.
Lump-sum payment. Alternatively, you can opt for a lump-sum payment. This grants you immediate access to the full amount, which you can manage or invest as you like.

Lump-sum payouts may also allow you to consolidate accounts or manage distributions more tax-efficiently through rollover IRAs.

Keep in mind that pensions are funded with pretax income, lowering your taxable income during your working years. However, this means that pension payments are subject to income tax upon withdrawal, unless you made after-tax contributions to your plan.

Under the current tax code, required minimum distributions (RMDs) from pension payouts begin at age 73 or age 75 if you were born in 1960 or later. An exception to avoid RMDs applies if the account owner is still working.

Make sure you’re taking the right amount by starting your own RMD calculation.

Required Minimum Distribution (RMD) Calculator

Estimate your next RMD using your age, balance and expected returns.

Quickly estimate your RMDs and when to take them

RMD Amount for IRA(s)

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RMD Amount for 401(k) #1

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RMD Amount for 401(k) #2

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About This Calculator

This calculator estimates RMDs by dividing the user's prior year's Dec. 31 account balance by the IRS Distribution Period based on their age. Users can enter their birth year, prior-year balances and an expected annual return to estimate the timing and amount of future RMDs.

For IRAs (excluding Roth IRAs), users may combine balances and take the total RMD from one or more accounts. For 401(k)s and similar workplace plans*, RMDs must be calculated and taken separately from each account, so balances should be entered individually.

^*The IRS allows those with multiple 403(b) accounts to aggregate their balances and split their RMDs across these accounts.

Assumptions

This calculator assumes users have an RMD age of either 73 or 75. Users born between 1951 and 1959 are required to take their first RMD by April 1 of the year following their 73rd birthday. Users born in 1960 and later must take their first RMD by April 1 of the year following their 75th birthday.

This calculator uses the IRS Uniform Lifetime Table to estimate RMDs. This table generally applies to account owners age 73 or older whose spouse is either less than 10 years younger or not their sole primary beneficiary.

However, if a user's spouse is more than 10 years younger and is their sole primary beneficiary, the IRS Joint and Last Survivor Expectancy Table must be used instead. Likewise, if the user is the beneficiary of an inherited IRA or retirement account, RMDs must be calculated using the IRS Single Life Expectancy Table. In these cases, users will need to calculate their RMD manually or consult a finance professional.

For users already required to take an RMD for the current year, the calculator uses their account balance as of December 31 of the previous year to compute the RMD. For users who haven't yet reached RMD age, the calculator applies their expected annual rate of return to that same prior-year-end balance to project future balances, which are then used to estimate RMDs.

This RMD calculator uses the IRS Uniform Lifetime Table, but certain users may need to use a different IRS table depending on their beneficiary designation or marital status. It's the user's responsibility to confirm which table applies to their situation, and tables may be subject to change.

Actual results may vary based on individual circumstances, future account performance and changes in tax laws or IRS regulations. Estimates provided by this calculator do not guarantee future distribution amounts or account balances. Past performance is not indicative of future results.

SmartAsset.com does not provide legal, tax, accounting or financial advice (except for referring users to third-party advisers registered or chartered as fiduciaries ("Adviser(s)") with a regulatory body in the United States). Articles, opinions and tools are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual. Users should consult their accountant, tax advisor or legal professional to address their particular situation.

Advantages of Pension Plans

Automatic Savings

One of the major advantages of a pension comes while you’re working. Because your employer makes the contributions and handles the payouts, you don’t have to worry about the finer details.

Easy Distributions

You don’t have to worry about creating any contracts or agreements with your employer. If you have a pension, your employer will pay it out once you retire.

This is similar to Social Security benefits in that you automatically get regular payments. You don’t have to do significant research, choose plans or set up a relationship with a bank or insurer that you don’t already know.

Insurance

An advantage of pensions after you start payments is insurance from the Pension Benefits Guaranty Corporation (PBGC). The PBGC is an agency that the U.S. government specifically created to protect private-sector pensions. If you have a private-sector pension and the company handling your pension goes bankrupt, the PBGC will step in to try to get you as much of your pension as possible. There’s no guarantee you get your full pension, but you’ll probably get most of it.

As of 2026, the PBGC caps monthly payouts for a 65-year-old retiree with a single-life pension at $7,789.77.

Disadvantages of Pension Plans

Less Transparency

The fact that you don’t need to handle the day-to-day maintenance of your pension is a disadvantage for some. It could mean less transparency about how much you have. Plan performance reports may not be shared frequently, and participants often rely on HR summaries instead of full investment statements.

Estate Planning

Another consideration is what happens to your pension when you die. Even if you still have pension money left to pay, your plan may end if you’re not there to collect the payments.

Before you start collecting, ask if your family or someone else can collect the remaining payments after your death. Spousal continuation options may reduce monthly payments but provide post-death income to a surviving partner.

What Is an Annuity?

A couple researching the difference between a pension vs. an annuity.

An annuity is an insurance product offered by an insurance company.

You purchase the contract for a certain amount of money, which you will fund through either a lump sum or periodic payments. The insurer will then invest your money in mutual funds, stocks or bonds.

Your contract will stipulate when you begin receiving regular payments from your annuity, but this is usually when you retire.Exactly how long the payments last (for a set number of years versus until your death) and the amount per payment will all depend on your specific agreement.

Advantages of Annuities

Greater Control

A big advantage of annuities is that you are the one who buys an annuity. That means you decide how much money to put in and which annuity contract to sign.

You also have the ability to dictate what your payments look like. For example, people who are worried about outliving their retirement funds can buy an annuity that lasts until their death.

Keep in mind that an annuity only pays you the money you put in, plus reasonable growth that the money experiences from investing. Another reason to buy an annuity is to help your family fund expenses incurred from your death.

Tax Advantages

You have the option to fund your annuity with after-tax money. If you do this, you won’t have to pay income tax later when you receive that money as a monthly payment. It is a benefit similar to Roth IRAs.

Disadvantages of Annuities

Complexity

There are multiple types of annuities available, including fixed annuities, variable annuities and indexed annuities. You can also change the terms of an annuity contract to meet your specific needs.

If you’re unfamiliar with annuities, the process of finding the right contract can quickly become overwhelming. This is where a financial advisor can help walk you through all your options and offer professional guidance on the best annuity for you.

Additional Fees and Commissions

Because the insurer is investing your money in the stock market for you, there will likely be some maintenance fees. Individual funds will also charge fees.

Be sure you understand all fees before signing any contracts.

No Flexibility

Once you put money into an annuity, you cannot get it back. Unlike other retirement accounts, such as a 401(k), you cannot withdraw funds.

No Insurance

Unlike pensions, annuities are not insured. However, losing your annuity payments isn’t necessarily a big concern if you work with a well-established annuities provider.

You should also note that state guaranty associations may offer limited protection if an insurer becomes insolvent, but coverage caps vary by state.

Pension vs. Annuity: Key Differences and Considerations

When comparing a pension vs. an annuity, there are a few key differences investors should keep in mind.

Investment Options

Pension plans typically offer a range of investment options, including mutual funds, stocks and bonds, but the plan administrator selects and manages the exact allocation.

Annuities, on the other hand, generally offer fewer investment options. Plus, they often depend on the performance of the investment portfolio chosen by the insurance company.

This is the case with fixed annuities, which can be invested in corporate and government bonds. By contrast, the owners of variable annuities can pick underlying investments but, they take on much of the investment risk.

Fees

Pension plans and annuities both charge fees, but annuity fees are generally higher.

Annuity vs. Pension Plan Costs

Annuity Costs	Pension Plan Costs
Administrative feesInvestment management feesMortality and expense feesSurrender charges (for early withdrawals)	Administrative feesInvestment management feesEarly withdrawal fee

Performance

The investment performance of a pension plan vs. an annuity can vary, depending on the investment options and fees associated with each retirement product.

Pension plans may offer higher returns if the investment options are managed effectively. Meanwhile, annuities provide a guaranteed income stream, regardless of market performance.

Other Considerations

In general, an annuity will give you the most control over your money.

If you take a lump-sum pension payment, you can use the money however you choose. For some people, it could make the most sense to use a portion of your lump sum to purchase an annuity. Then you could invest the rest in an IRA or other tax-deferred retirement account. You’ll still have the advantage of regular income via the annuity, plus other money that’s growing but still remains accessible in case of an emergency.

Overall, a pension requires the least thought and planning. If you have any concerns about the future of the company paying your pension, it could be wise to choose a lump sum.

However, as mentioned, your pension is likely to pay out at least most of its value because federal law protects pension payments.

Pension Lump Sum vs. Monthly Payments

When a pension offers a choice between a lump-sum payout and monthly payments, the decision affects income structure, taxes and long-term planning.

Monthly pension payments provide a fixed income stream for life or for a set period. A lump sum represents the present value of the pension paid upfront, offering predictable income vs. direct control of assets.

Tax treatment differs by option. Monthly pension payments are taxed as ordinary income in the year received. A lump-sum distribution can be rolled into an IRA to defer taxes or taken as taxable income in the year of distribution. The timing of the payout, current and future marginal tax brackets and interaction with other income sources influence after-tax outcomes.

Risk allocation also varies. With monthly payments, the pension plan bears investment risk and longevity risk. Payments continue regardless of market performance and, in many cases, lifespan. A lump sum transfers these risks to the retiree, who manages investments and withdrawal rates. Poor market performance or longer-than-expected life can affect how long the funds last.

Estate treatment and flexibility differ, as well. Monthly pension payments often end at death unless a joint-and-survivor option was elected, which can reduce the payment amount. A lump sum becomes part of the retiree’s assets and can pass to heirs. Some retirees allocate part of a lump sum to an annuity to create lifetime income while keeping assets available for other expenses or goals.

Bottom Line

A couple choosing whether to set up a pension vs. an annuity.

Whether you opt to receive regular payments from a pension or an annuity, the payments will ultimately depend on your financial situation.

Begin with a retirement budget to determine how much you will spend on essentials. Then, consider all your sources of retirement income. Do you have enough to cover what you need? If you do, consider taking your pension payments. You may not want to go through the work and cost of finding the best annuity. If you don’t have enough retirement income to cover your costs, then putting money into an annuity may be a way for you to earn more money than you would otherwise have.

Tips to Help You Save for Retirement

When you think about retirement savings, it can also be helpful to consider enlisting the aid of a financial advisor. An advisor can help you create a plan to pursue your savings goals for the short and long term. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
The best way to start saving for retirement is by taking stock of what you already have. Then, as part of the budgeting process, you’ll know how much more income you need to meet your spending. Do you have any savings in an employer’s 401(k)? If so, use this 401(k) calculator to see how much you’ll have in your account when you retire. For those who don’t have access to a retirement account through an employer, have you considered a traditional IRA or Roth IRA?
As you get closer to retirement, you’ll be looking into your Social Security benefits. Social Security provides a regular source of income. But first, you need to make sure that you apply for Social Security.