Difference Between an Employer Provided Pension & a Supplemental Retirement Annuity?

Planning for your retirement is an important part of making sure your future is secure so you can enjoy your golden years. Today, you have many different options for providing yourself an income during retirement. An employer-provided pension is one of the most common types of retirement plans, along with individual retirement arrangements (IRAs). But sometimes, this is not enough, and you might want to consider a supplemental retirement annuity plan.

Annuity From Employer

The most common way for people to receive a retirement income is through spending years working for a single employer. During this time, you can contribute to an employer-sponsored retirement plan. This is usually in the form of a 401(k) or another type of benefit plan.

Sometimes, an employer might offer these in the form of an annuity. They might use a third-party insurance company to provide an annuity that is deducted from the employee’s paycheck along with employer retirement plan benefits. Annuities that are part of employer retirement plans can come in many different forms. The plan contribution is often included as part of the overall plan contribution from the employee. Sometimes, the employee must make a separate contribution. They can be in the form of either pre-tax or after-tax contribution amounts.

Some will qualify for a tax-sheltered annuity plan, such as a 403(b), from their employer. According to the IRS, 403(b) companies include public schools and specific 501(c)(3) tax-exempt organizations.

Consider Also:What Is an Annuity Starting Date?

Supplemental Retirement Annuity Plan

A supplemental retirement annuity plan is an insurance instrument where the eventual recipient contributes to the plan for a certain number of years. When the annuity matures, the employee will receive regular payments. They can receive them as a lump sum or as payments over time.

Insurance companies offer different types of annuity plans and terms. They have different fees, maturity dates and rules for early withdrawal. The main benefit of a structured annuity plan is that it gives you an extra source of income in retirement other than an employee pension plan.

Key Differences in Retirement Plans

Several key differences exist between an employer-sponsored retirement plan and an annuity. The first is that a pension is usually distributed as a regular amount of money each month until the end of the person’s life. In some cases, employers will give you the option of receiving the distribution as a lump sum. An annuity can have a set number of years in which it will payout, but you can also take a lump-sum distribution. The annuity payments can end when you have many years of life left.

An employer pension is usually determined by the amount that the employee contributed during his or her years at the company. An annuity is for a fixed amount according to the contract. Another difference is that with an employer pension, you must wait until retirement to begin withdrawing your funds. With an annuity, you do not have to wait until you retire, but withdrawing the funds before it matures can have stiff penalties attached.

Retirement Plan Fees and Taxes

The most important considerations when deciding between an employer pension and an annuity are fees and taxes. Many factors are used to determine your tax liability, including the type of plan and whether it is a qualified or nonqualified plan. The IRS provides this tool to help you determine your tax liability from your pension or supplemental annuity. Your payments might be fully taxable, partially taxable or able to be rolled over into another instrument.

Consider Also:How to Calculate Pension Benefits

While many people still have the option of working for a single employer for all their working life, many are choosing other options, including working for themselves. They do not have the option of contributing to an employer benefit plan. Contributing to an IRA or annuity can be the main source of retirement income for them.