A pension vs annuity checklist tracks dates that trigger payments and taxes, documents that prove what you are owed, and payout decisions that are hard to reverse. A pension is an employer retirement plan benefit, while an annuity is a contract that pays income for a set period or for life. Use the list before you choose a start date, a lump sum, or a monthly check. It helps you keep survivor protection, tax withholding, and fees in view.
Table of Contents
- Which dates control required payments?
- Which statements should you keep?
- How are pension and annuity payments taxed?
- What happens if you take a lump sum?
- What limits and costs should you check before you decide?
Which dates control required payments?
Workers born in 1951-1959 reach required minimum distributions at age 73. Those born in 1960 or later reach them at age 75. The Congressional Research Service reports these ages in its Congressional Research Service summary.
The first distribution is due by April 1 after reaching that age. Later distributions are due by Dec. 31 each year. Missing the calendar can create extra taxable income in one year.
Which statements should you keep?
Department of Labor guidance sets minimum paper-statement timing for plans. Defined-contribution plans must furnish at least one paper benefit statement per year. Defined-benefit plans generally must furnish one every three years.
Keep the latest statement, the plan summary, beneficiary forms, and payout estimates together. Those papers show accrued amounts, start-date options, and survivor terms. They also make it easier to spot errors early.
How are pension and annuity payments taxed?
Workers who made after-tax contributions are taxed on only part of each payment. IRS Publication 575 and Topic 411 explain recovery of that cost with the Simplified Method worksheet. The IRS resource is available in IRS Publication 575.
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Use the worksheet to split each check into taxable and tax-free parts. Keep contribution records with tax returns. That record prevents paying tax twice on the same dollars.
What happens if you take a lump sum?
A lump sum paid to you rather than directly rolled over faces mandatory 20% federal withholding. The IRS instructions explain the reporting on Form 1099-R in its instructions for Forms 1099-R and 5498.
The payment is reported on Form 1099-R. To complete a full 60-day rollover, you must add funds to replace the withheld amount. A direct rollover avoids that withholding gap.
What limits and costs should you check before you decide?
Married participants in plans with a qualified joint-and-survivor annuity must receive that survivor-protected form unless the spouse gives written witnessed consent. IRS guidance on spousal consent under IRC 417 describes that protection. Do not sign a lump-sum election until both spouses understand the survivor trade-off. If a private single-employer pension fails, Pension Benefit Guaranty Corporation coverage has a cap. Mercer reporting on the PBGC announcement puts the 2025 cap at $89,181 per year at age 65 in its Mercer report on the PBGC announcement.
Earlier start dates or survivor forms lower the cap, so high earners may lose amounts above it. SEC and FINRA jointly warn against selling pension or structured-settlement income for a lump sum. Factoring firms impose steep discounts, fees, and loss of creditor protections. Variable annuities add another layer of cost, with FINRA warning about mortality-and-expense, administrative, fund, rider, and surrender charges in its FINRA investor alert copy. Surrender charges can start around 7% and last years, while earnings withdrawals are taxed as ordinary income rather than capital gains.
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