If you already have a pension, you probably do not need an annuity. A pension and a commercial annuity solve the same problem, which is guaranteed lifetime income, so a second layer is only worth paying for when your pension leaves a specific gap. The useful question is not whether to buy one in general but whether your pension covers essential expenses, keeps up with inflation, protects your spouse, and comes from a plan you can count on. Where any of those breaks down, an annuity can fill the hole. Where none does, additional savings usually belong in an investment portfolio instead.
Start With Whether Your Pension Covers Essentials
Pull your latest pension statement and find the gross monthly benefit. Then estimate what you keep after federal income tax. For 2026, federal rates run from 10% on the first $12,400 of taxable income for single filers up to 37% on income above $640,600.1 Most retirees sit in the 12% or 22% bracket, though pension income stacked on Social Security and required minimum distributions can push you higher than you expect.
Compare that after-tax number against your fixed monthly costs: housing, property taxes, insurance, groceries, utilities, and healthcare. Healthcare hits harder than most people plan for. The standard Medicare Part B premium for 2026 is $202.90 per month, up from $185.00 in 2025. If your modified adjusted gross income exceeds $109,000 as an individual or $218,000 filing jointly, an income-related surcharge (IRMAA) can push the total Part B premium as high as $689.90 per month.1 Part D carries its own surcharges on the same thresholds.
If a household needs $4,500 a month and the after-tax pension delivers $3,200, the $1,300 gap is the amount of guaranteed income an annuity could realistically fill. If the pension covers 100% of fixed obligations, the case for buying an annuity weakens sharply, because other savings can cover discretionary spending with room for growth. A pension covering only 60% of necessary expenses is the situation where an annuity earns its keep, because you would otherwise be dependent on investment returns or account drawdowns to pay for the basics.
The Inflation Gap in Most Private Pensions
Most private-sector pensions pay a fixed dollar amount with no cost-of-living adjustment. Bureau of Labor Statistics data has historically shown that fewer than one in ten private-sector pension participants get an automatic COLA. Federal pensions (FERS and CSRS) and some state government plans do adjust for inflation, but a corporate pension check generally stays flat for life.
At 3% average annual inflation, a $2,000 monthly pension loses roughly half its purchasing power over 25 years. By year 20, that $2,000 buys what about $1,100 buys today. For someone who retires at 62 and lives to 87, a pension that comfortably covers groceries and utilities in the early years may not cover groceries alone by the end.
Some commercial annuities offer inflation-linked riders or built-in annual increases, typically 2% to 3% per year. The trade-off is a lower starting payment. An annuity with a 3% annual increase might start 20% to 25% below a flat payout for the same premium. Whether that makes sense depends on how long you expect to need the income and how much your pension already covers. If the pension handles your baseline and you are funding travel, higher early payments may serve you better. If the annuity is filling a gap in essential expenses, the inflation protection matters more.
What Happens to Your Spouse’s Income
Federal law requires most pension plans to offer a Qualified Joint and Survivor Annuity (QJSA) as the default payout. Under 26 U.S.C. § 417, the survivor benefit must be between 50% and 100% of the amount paid during the participant’s life.1 A participant can waive the QJSA and take a higher single-life payment only with the spouse’s written consent.
The 50% survivor option is where trouble starts. If a household leans on the full pension for taxes and housing, a 50% cut when one spouse dies can create real hardship for the survivor. Selecting the 100% survivor option solves it but reduces the initial monthly payment, sometimes by 10% to 15%.
A commercial annuity can bridge the difference. The pension recipient takes the higher single-life or 50% survivor payment, then buys a separate annuity on his or her own life payable to the surviving spouse. The annuity replaces the income the pension stops providing. The math to run is straightforward: compare the annuity premium against the lifetime income difference between the 50% and 100% survivor pension options. This strategy works best when the premium comes from non-retirement assets, since using IRA or 401(k) money to buy the annuity creates a taxable event.
Employer Risk and the PBGC Cap
If your employer’s pension plan fails, the Pension Benefit Guaranty Corporation steps in as trustee and continues paying benefits up to a legal maximum. For 2026, that cap is $7,789.77 per month ($93,477 annualized) for a 65-year-old receiving a straight-life annuity, or $7,010.79 per month under a joint-and-50%-survivor option.1 If your pension benefit sits below those limits, the PBGC covers it in full. If it exceeds the cap, you lose the excess.
Government and church pension plans are not covered by the PBGC, so if your pension comes from a state, municipal, or church employer, your protection depends on the financial health of the sponsoring entity. For high earners with corporate pensions above the PBGC cap, or for anyone with a pension outside the PBGC system entirely, diversifying a portion of retirement income through a commercial annuity from a highly rated insurer can reduce single-point-of-failure risk.
Commercial annuities have no federal backstop. Each state operates a life insurance guaranty association that covers policyholders if an insurer becomes insolvent. Baseline coverage for annuity benefits under the NAIC model is $250,000 per owner, per insurer.1 Some states go up to $500,000, and a few cover less. Coverage is set by your state of residence, not the insurer’s home state. If you buy an annuity with $400,000, splitting it between two highly rated insurers keeps each contract within the guaranty limit. Look for financial strength ratings of A+ or higher from AM Best or an equivalent agency; the guaranty association is a last resort, not a first line of defense.
Using a QLAC to Manage RMDs
Required minimum distributions from traditional IRAs and 401(k)s begin at age 73 and are taxed as ordinary income.1 When those RMDs land on top of pension income and Social Security, they can push you into a higher bracket and trigger IRMAA surcharges on Medicare.
A Qualified Longevity Annuity Contract (QLAC) is a deferred annuity designed for retirement accounts. You fund it with traditional IRA or 401(k) money, and the amount invested is excluded from your RMD calculations until payments begin, which can be as late as age 85. For 2026, the maximum QLAC premium is $210,000 across all eligible accounts.1
For someone with a pension and a sizable traditional IRA, a QLAC does two things. It reduces taxable RMDs during the years you do not need the extra income, which can keep you in a lower bracket and potentially below the IRMAA thresholds. And it creates a second stream of guaranteed income later in retirement, when inflation has done the most damage to a flat pension. If you live well past 85, the QLAC payments are there. If you do not, you have only committed a fraction of your portfolio.
Costs That Can Erase the Benefit
Annuity fees vary enormously by product, and heavy fees can eat the very income the annuity was supposed to add on top of your pension.
A Single Premium Immediate Annuity (SPIA) has the simplest cost structure. The insurer’s margin is built into the payout rate, so there are no ongoing fees. You hand over the premium and receive a monthly check for life. As a rough benchmark, a 65-year-old male buying a life-only SPIA can currently expect around $7,800 per year in income for every $100,000 of premium, while a 65-year-old female receives roughly $7,500 due to longer life expectancy.
Variable annuities sit at the opposite end. They stack mortality and expense charges (typically 0.15% to 1.50% of account value annually), administrative fees (0.10% to 0.30%), subaccount management fees (0.10% to 1.50%), and optional rider costs for lifetime income guarantees (0.50% to 1.50% or more). Total annual costs can reach 2.5% to 3.5% per year. For someone who already has guaranteed income from a pension, paying that much for a second layer of guarantees rarely makes sense.
Deferred annuities also carry surrender charges. A typical schedule starts at 7% in the first year and declines by about one percentage point annually, reaching zero after seven or eight years. Most contracts allow penalty-free withdrawals of up to 10% of account value each year, which means 90% of your money is effectively locked up during the surrender period. Withdrawals from a deferred annuity before age 59½ are generally subject to a 10% early withdrawal penalty on the taxable portion, on top of ordinary income tax; exceptions exist for disability, death, and substantially equal periodic payments.1 Keep enough liquid savings outside any annuity to handle a major home repair, medical bill, or long-term care cost without triggering surrender charges or penalties.
When an Annuity Does Not Add Anything
If your pension fully covers your fixed expenses, includes a COLA or is paired with a COLA-adjusted government pension, provides adequate survivor benefits, sits below the PBGC cap, and comes from a well-funded plan, your guaranteed income base is already solid. Additional savings are usually better deployed in a diversified investment portfolio that offers growth, flexibility, and liquidity. An annuity gives up all three once the premium is paid.
The cases where an annuity earns its place are the mirror image: the pension does not cover essentials, has no inflation adjustment and decades left to run, would drop a spouse’s income to an unlivable level, exceeds PBGC protection, or sits alongside a large traditional IRA whose RMDs will drive up your tax bill and Medicare premiums. In those situations the annuity is not a duplicate of the pension. It is filling a specific gap the pension cannot.