Are you thinking about buying a pension, but worried that you’ll make a mistake and lose your money? If you do that, you are not alone. Pensions are complicated, expensive, and lasting after a short window.
Plus, not all pension sellers are sincerely at your peak. A non-cruel sales representative can charge you an additional fee or sell products that are not your biggest profit, so if you are worried you can understand.
But that doesn’t mean you should avoid pensions entirely. For certain individuals, pensions are a way to earn guaranteed income upon retirement. This is one of the main reasons pension sales exceeded $100 billion in the first quarter of 2025.
Subscribe to Kiplinger’s personal finances
Be smarter, better informed investors.
Save up to 74%
Sign up for Kiplinger’s free e-newsletter
Remember profits and prosperity with expert advice on investments, taxes, retirements, personal finances and more – directly to email.
Profit and prosperity with the advice of the best experts – directly to your email.
With that in mind, see how it makes sense to buy an pension and how to prevent yourself from being destroyed if you decide to buy guaranteed income through your pension.
Pension Purchase: When That Makes Normal
Decisions are easy if you have access to your pension through an employer-sponsored retirement plan. The products have already been vetted through the company’s plan sponsors, so you don’t have to worry about shopping.
Timothy Pittney, TIAA’s head of lifetime income default sales, says it’s usually cheaper than buying in the retail market. “They don’t have the lockups or committees you found at retail,” Pitney says. “There’s a trustee’s oversight. Often these plans are supported by consultants. They tend to have far higher quality products than they find in the retail space.” That segment is growing, but not all 401(k) or 403(b) plans offer it.
Douglas Ornstein, the wealth management coach director at Tier Awesome Management, ask yourself why you want to buy an pension first if you don’t have access to one via the 401(k) or 403(b).
“When it comes to pensions, I would like to think about pensions, primarily in contrast to purely investment instruments,” Ornstein says. “You want something low cost. It’s not where you can get lots of bells and whistles,” or expect to expect a big return on your investment.
Pensions make most sense for those who want to guarantee income when they retire and are worried that they will run out of money in the golden age. When you use an annuity, you sign a contract with an insurance company and make payments over a specified period. That money will be invested and paid to you at a later date, as a temporary, temporary payment or annual payment.
Pensions are also suitable for individuals who want to play safely but want a better return than a bank CD. Fixed pensions tend to outweigh the bank’s CDs because they are held longer, giving you more time to invest money in insurance companies and grow them.
Pensions also make sense for those who want to supplement Social Security benefits as part of their retirement, or as a bridge until they can claim Social Security if they retire early, Ornstein says. You can also use pensions to pay for the aging process or long-term care costs, he says.
“You sometimes hear people who buy pensions because they’re scared about the market, and that might be a good reason if you have an overall financial plan that’s diversified in the context of a broader goal,” he says.
How to prevent yourself from being ripped
Once you understand why you are purchasing an pension, you need to make sure you purchase it without tearing it. That is the event of education. When it comes to retail pension shopping, knowledge cannot be power. It is important to understand the type of pension and all costs.
Types of pensions
There are several types of pensions, but the main ones include:
– Modified pension: Payments are made at the same amount each month. With a fixed pension, you know exactly how much you receive each month.
-Variable Annuity: Payments are linked to rising and falling in underlying investments.
-Indexed Annuity: Payments are associated with the performance of indexes such as the S&P 500.
-Immediate Annuity: Payments are usually made as a lump sum payment. We will then begin receiving your payment within 12 months. Immediate pensions can be fixed or fluctuating.
– Income for Life Pension: Regardless of the age you live, payments are for life. Payment sizes vary depending on the size of your account and the average life expectancy of the person holding the pension. This type of pension can be fixed or variable.
Pension costs and fees
Please note these regarding pension costs.
– Commission: This is the price that applies to agents who work with you to purchase an pension. The committees vary based on the type of pension and its complexity. The more complicated the committee is. According to Annuity.org, it ranges from 1% to 8%.
– Dosing Costs: These are charges that cover the management costs of pensions, recordkeeping and processing transactions, as well as other administrative costs. This fee is usually less than 0.3% of the annual pension value.
– Surrender Fee: A penalty deducted from the account value if money is removed from the pension. The surrender fee will vary depending on the insurance company, age and the amount withdrawn.
– Rider: These are the additional benefits that you can add to your pension at a fee. Common types of pension riders include living benefits and death benefits.
Consider professional help from a financial advisor
When shopping for annuity, Ornstein encourages clients to ask their advisors and sales representatives about the conflict of interest they have, how they are compensated, and whether the advisor is a trustee. Since the trustee is not paid by the insurance provider, there is no incentive to recommend one pension over another. Pension brokers may do that. Therefore, it is important to find this before purchasing an pension.
You can purchase pensions through the market, but pensions need to be integrated into a broader financial plan. Therefore, working with a financial advisor may be your best option.
“A pension expert may have pension expertise, but that may not be the same person who can see the overall short, medium-term, long-term goals of an individual,” Ornstein says. “A lot of things come into a comprehensive financial plan. I recommend that you first talk with a comprehensive financial advisor and check with your clients to see if the pension is right for them.”
Don’t lose sight of the goal
At the end of the day, when considering whether you need to buy an pension, don’t lose sight of your final goal: managing risks when you retire. The key is to have a diverse income flow that addresses the four risks you face: market risk, life expectancy risk, cognitive risk and pension risk.
“That doesn’t mean putting all the money in your pension,” Ornstein says. “It means having a wide range of diverse strategies to earn income. Pensions must be a strong consideration.” But that may not be the end of it all.
