Q:

What is the difference between an annuity and a pension?

A:

Quick Answer

Pensions are funds that receive contributions from both an individual and her employer, while annuities are funds that are bought by individuals for their own benefit. An employer has more control over a pension fund.

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Full Answer

A pension fund is money pooled by workers and employers using a portion of the worker's salary. The money in the fund is managed by either a financial services company or an in-house manager. The goal is to provide growth through investment. When a worker retires, the money is guaranteed to be there for the worker to withdraw.

An annuity is designed to provide a steady stream of income to an individual. The individual can buy into an annuity fund, which has similarities to a pension fund, and from there can arrange for the specific details of the annuity contract. The individual can decide whether the payments will be fixed or varied, depending on how well the fund grows. A person has the option of buying an annuity that pays out for the rest of her life, or she can choose to purchase one that pays her for 25 years, with payments going to her spouse if she passes away before the 25-year term ends.

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