Annuity vs. Pension: Making the Right Choice for Your Business

Did you know that offering competitive benefits can be part of your strategy to keep employees? Benefits that look out for the wellbeing and future of your employees helps them “buy-in” to your business. Employee-centric benefits also help you attract top talent! You’re offering benefits to help them now – and later, and that has an impact.

The easiest way to keep employees is to treat them well. There are many ways to do this, including through group annuities and pensions.

What is a group annuity?

A group annuity is a type of retirement plan that you can offer employees by working with life insurance companies. The group annuity provides your employees retirement benefits like periodic payments or a lump sum.

What is a pension?

A pension is a type of plan that guarantees a payment to your employees after they retire. The payments are typically based on factors like years of service and salary.

• Tax-qualified, meaning that offering these plans gives you a tax benefit because they meet the standards set by the IRS.
• A way to help your employees address a common concern – outliving their savings – by providing payments in retirement.

• Benefits that can help you attract and retain employees.

• There is less financial uncertainty. With a group annuity, you pay a lump sum up front and the insurance company makes the payments to your employees. With a pension, lower-than expected earnings can keep you from being able to save the proper funds needed to pay. In fact, in recent years many companies have switched their pension to a group annuity. These companies have made the switch to help reduce the financial burden and still provide the retirement benefit to their employees.¹
• You have options. There are multiple types of group annuities that can offer different protections for your business and your employees.

• They are often protected. Most pensions are insured by the Pension Benefit Guaranty Corporation (PBGC). The PBGC was set up by Congress to protect pension plans and covers nearly 44 million Americans’ pensions. This insurance means that even if you can no longer fund your pension plan, your employees can still receive some benefits.²

1. Costs

1. • Pensions often have higher set up and management fees than other types of retirement plans.

1. 1. • If paying higher annual maintenance costs isn’t something you’re comfortable with, a group annuity may be better for your business.

2. Protection

1. • Group annuities are not federally protected but many pension plans are.

1. 1. • If you want to ensure that your employees receive the payments, a protected pension plan could give you that peace of mind. Group annuities are often insured by state associations which can add some protection, but the payments are typically linked to the insurer’s ability to pay.

Other options

Is neither a pension or group annuity perfect for you and your business? Don’t worry! There are other options employees appreciate.

One option is to provide a 401(k). 401(k)s are a type of retirement plan, but one that places more financial responsibility on the employee. Outside of set up and management fees, your employees are responsible for contributing to the account. If you want to take it one step further, you can offer to match their contribution. This means that if an employee invested 4 percent of their salary, you would also contribute that amount. By offering a 401(k) you are still helping contribute but don’t bear the brunt of the financial responsibility.

If helping your employees plan for retirement isn’t in the cards for your business right now, there are other ways to beef up your employee benefits package that cost less. For example, you could implement a flexible work schedule or provide lunch once a week.

Talk to a licensed agent/producer to learn more about which strategy would be best for your business and employees.

Consult with a professional tax and/or legal advisor before taking any action that may have tax or legal consequences. 

Sources: 

1 Sheedy, R. L. (2018, January 30). Web page: When a Pension Turns into an Annuity. Retrieved July 8th, 2024, from https://www.kiplinger.com/article/retirement/T003-C000-S004-when-a-pension-turns-into-an-annuity.html.  

2 Pension Benefit Guaranty Corporation A U.S. Government Agency. (n.d.). Web page: Single-Employer Plans: Your Guaranteed Pension. Retrieved July 8th, 2024, from https://www.pbgc.gov/wr/benefits/guaranteed-benefits/your-guaranteed-pension. 

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