Difference Between Annuity and Pension Plan (2025)

Retirement planning in India is becoming more important because long-term income security is now a priority for most families. Medical costs increase every year due to changes in lifestyle these days. And so you need a clear understanding of pensions vs annuities to avoid income gaps after retirement. The difference between annuity and pension affects your savings strategy, your future cash flow, and your long-term safety. When you compare an annuity vs a pension plan, you also compare stability, flexibility, growth potential, and risk comfort. This guide gives you detailed information so you can make an informed decision in 2025.

What Is a Pension Plan?

A pension plan is a long-duration savings product. You contribute money through regular premiums. The plan builds a retirement fund over many years. Your savings grow through guaranteed additions or market-based growth. This helps you receive income when you retire.

How Pension Plans Work

• You contribute some amount of money on a monthly or yearly basis during your earning phase.
• Your contributions enter a traditional plan or a ULIP-based pension plan.
• Traditional plans give guaranteed additions and bonuses.
• ULIP pension plans invest in equity or debt funds based on your risk comfort.
• The plan builds your retirement corpus for ten to thirty years.
• You receive the money as a lump sum, a monthly income, or a mix based on your selected option.
• Many pension plans also let you convert part of the maturity into an annuity for lifelong income.

Benefits of Pension Plans

• Builds a disciplined habit of long-term saving.
• Grows your money with the compound effect.
• Gives predictable returns in traditional pension plans.
• Gives higher growth potential in ULIP pension plans.
• Offers payout choices for different retirement needs.
• Protects you from inflation pressure because long-term savings grow slowly but steadily.
• Supports individuals who want gradual wealth building without high risk.

H3: Drawbacks of Pension Plans

• Lock-in periods stay in place for many years.
• Surrendering the plan brings financial loss.
• Returns stay lower than risky assets because these plans focus on safety first.
• Limited flexibility in some traditional plans.

What Is an Annuity?

An annuity gives you a fixed payout for life or for a fixed duration. When you buy an annuity with a lump sum amount, the goal is to create a stable monthly income after retirement. People often buy annuities with the maturity amount from their pension plans or other savings.

Types of Annuities

1. Immediate Annuity

• Starts paying income right after purchase.
• Suitable for retirees.

2. Deferred Annuity

• Income starts after a chosen future date.
• Good for people planning ahead.

3. Lifetime Annuity

• Pays as long as you live.

4. Joint-Life Annuity

• Continues paying a spouse after your death.

Benefits of Annuities

• Guaranteed income for life.
• Predictable payouts regardless of market performance.
• Useful for senior citizens seeking a stable cash flow.
• Joint-life annuities provide family security.

Drawbacks of Annuities

• Returns may be lower than inflation in some cases.
• Annuity purchase is irreversible.
• Limited liquidity.

Pension vs Annuity: Key Differences

Factors to Consider Before Choosing

Age & Life Expectancy Impact

Younger individuals benefit from pension plans because their money grows over long periods. Whereas older individuals select annuities because they need income without delay. Longer life expectancy makes lifetime annuities more useful.

Risk Appetite

Low risk individuals select annuities for stability. While moderate risk savers build a pension corpus and then buy an annuity. And on the other hand, higher risk savers select ULIP pension plans for stronger growth.

Taxation Rules in 2025

Pension plan withdrawals follow tax exemption limits. And an annuity income falls under income from other sources. Tax slabs decide the final income received. You need to plan your income structure based on expected tax brackets after retirement.

Interest Rate & Market Conditions

High interest periods bring better annuity rates. Whereas, fixed annuity payouts stay higher when purchased during strong interest cycles. Market-linked pension plans perform better during stable or growing markets. You need to review interest trends before buying an annuity.

How Companies Calculate Pension & Annuity Amounts

1. How Pension Amounts Are Calculated

For pension plans, companies estimate your retirement corpus first. This depends on:

• Total invested premium
• Policy term (number of years invested)
• Guaranteed additions or bonuses (in traditional plans)
• Fund growth (in ULIP pension plans)

A simple, practical formula used for estimating your retirement corpus is:

Pension Corpus Formula

Corpus = (Annual Premium × Number of Years) + Bonuses + Guaranteed Additions + Investment Growth

In ULIP-based pension plans, the accumulation is usually calculated using:

Future Value of SIP Formula (for market-linked pension plans)

FV = P × [((1 + r)ⁿ – 1) / r] × (1 + r)
Where:

• P = Annual/Monthly premium
• r = Expected rate of return
• n = Number of years invested

This gives a rough estimate of how much you will have at retirement.

2. How Annuity Amounts Are Calculated

Annuity calculation is more technical because payouts are fixed for life. Companies use:

• Your age at the time of buying an annuity
• Current market interest rates
• Mortality tables (life expectancy probability)
• Type of annuity chosen (single life, joint life, return of purchase price, etc.)

The basic practical formula insurers use to estimate a monthly annuity is:

Annuity Payout Formula

Monthly Annuity = Purchase Price × Annuity Rate / 12

Where the annuity rate is influenced by interest rates and life expectancy.

Example:
If the annuity rate is 6% and your purchase price is ₹20,00,000, then:
Annual Annuity = ₹20,00,000 × 6% = ₹1,20,000
Monthly Annuity = ₹1,20,000 ÷ 12 = ₹10,000 per month

Which Is Better for Retirement? (Scenario-Based Guide)

Scenario 1: Early Retirees (Age 40-50)

Choose: Use a pension plan with a deferred annuity.

Reason: You grow your funds and decide when the income starts.

Scenario 2: Senior Citizens (Above 60)

Choose: Pick an immediate annuity.

Reason: You start receiving income at once.

Scenario 3: People with Medical Conditions

Choose: Pick a lifetime annuity.

Reason: Income supports medical costs without market risk.

Scenario 4: Risk-Averse Investors

Choose: Pick a mix of guaranteed pension plans and annuities.

Reason: You receive predictable growth and stable income.

Common Mistakes to Avoid (Annuity & Pension)

• Not checking lock-in periods.
• Buying annuities during low-interest periods.
• Ignoring tax effects in 2025.
• Not comparing the difference between annuity and pension across insurers.
• Skipping riders in pension plans that protect against illness or disability.

Making the Right Choice for Your Retirement Future

When comparing pensions vs annuities, remember that a pension helps you build your retirement fund, while an annuity helps you use that fund as a monthly income. Understanding the difference between annuity and pension can significantly improve your long-term retirement stability. The right combination of an annuity vs a pension plan depends on your age, risk appetite, health condition, and income needs.

For personalised retirement planning, exploring guaranteed solutions like the Shriram Life Premier Assured Benefits Plan or Shriram Life Assured Income Plan can help you build a reliable financial cushion for the future.

Disclaimer: The information provided is intended for general informational purposes only. For personalised recommendations, please consult a certified insurance professional.