Only 14% of Private Workers Still Have a Pension. He Bought an Annuity Instead, and Social Security Treats Those Checks Two Different Ways
He built his own pension using an annuity and assumed the two monthly checks in his mailbox played by the same rules. Two separate federal agencies see that annuity payment in completely opposite ways, and the gap quietly inflates his…
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KKR-owned retirement platform Global Atlantic launched ForeLifetime Income on Sept. 21. It is a new fixed-index annuity built around guaranteed lifetime withdrawals. In the announcement, the company pointed to a shift most retired people already feel: only 14% of private industry workers have access to a defined benefit pension plan.
Consider a 63-year-old who never had a pension. He used savings to buy an annuity and build one himself. Social Security is already paying him. Now two checks come monthly, but he assumes Social Security treats them the same way.
In fact, Social Security handles that annuity two different ways. For the earnings test, it can count as $0. Its taxable portion still helps decide how much of his Social Security gets taxed.
His Annuity Can Pay Thousands Without Triggering the Earnings Test
Before full retirement age (FRA), Social Security’s earnings test counts wages and net self-employment income. In 2026, someone below that threshold all year has $1 in benefits withheld for every $2 earned above $24,480. Pensions, annuities, interest and dividends are excluded.
Say his annuity pays $30,000 a year. If that were wages, Social Security would withhold about $2,760 of his benefits. From an annuity, nothing is withheld.
Where the IRS Finds Taxable Income in Every Check
An annuity bought with after-tax money pays back two things. One is his own principal, which comes back tax-free. The other is the growth, which is taxable. IRS rules split each periodic payment between those two pieces.
Assume $18,000 of his $30,000 is taxable and $12,000 is returned principal. That $18,000 goes into combined income: half your Social Security plus other taxable income. Say he also takes in $30,000 a year from Social Security:
| Item | Amount |
|---|---|
| Half of Social Security | $15,000 |
| Taxable annuity portion | $18,000 |
| Combined income | $33,000 |
For a single filer, benefits become taxable above $25,000 of combined income, and up to 85% can be taxed above $34,000. At $33,000, about $4,000 of his Social Security becomes taxable. Social Security counted the annuity as $0. The IRS counted it as $18,000.
A $5,000 IRA withdrawal for a roof drives his taxable Social Security to about $7,900, drawing another $3,900 of benefits into taxable income.
Two Agencies, Two Separate Questions About One Check
Social Security asks whether the money came from work. The IRS asks how much taxable income he has. The same annuity payment can pass the first test and still land on his tax return.
People taking before that point often miss this. The annuity payment doesn’t trigger the earnings test, so they assume it has no effect on Social Security. His monthly benefit stays whole, but more of it becomes taxable in April.
How He Bought the Annuity Changes the Taxable Share
A non-qualified annuity is one bought with after-tax dollars outside a retirement account. With that kind, the tax-free portion depends on how much he paid in and on the contract’s expected return under IRS rules. Two people who each receive $30,000 a year can report very different taxable amounts.
An annuity inside a traditional IRA works differently. If the IRA contains entirely pretax money, the whole payment is taxable. His combined income would rise to $45,000, and about $13,850 of his benefits would be taxable.
Four Numbers to Pull Before Signing Anything
- Annual annuity payment. This sets your spending budget but tells you nothing about taxes on its own.
- Taxable portion. Ask the insurance company for the exclusion ratio, the share of each payment treated as tax-free returned principal. This drives the Social Security tax math.
- Other income. Include IRA withdrawals, interest, dividends, capital gains, and part-time wages. Wages and net self-employment income are the sources here that also count toward the earnings test.
- Social Security amount. Half of your annual benefit goes into combined income. The 2027 COLA is currently tracking around 3.5%-3.6%.
What to Settle Before the First Annuity Check Arrives
An annuity can replace a pension: predictable income for life. The purchase itself is hardest to undo. Account type and payout start date shape your tax picture for years. Run the combined-income math with your real numbers before signing up, and plan withdrawals to stay clear of those thresholds (turning a lump sum into something that acts like a paycheck is the whole point of our free Paycheck Portfolio Method guide, which walks through the mix, the payment calendar and the withdrawal order).
The $25,000 and $34,000 thresholds have never been adjusted for inflation, so they catch more retirees every year. Your filing status, contract terms and state’s tax rules can all change these results, so an hour with a tax professional and your actual contract is time well spent.
Contact [email protected] for any questions or corrections.
Gerelyn Terzo is the author of dividend investing handbook "Dividend Investing Strategies: How to Have Your Cake & Eat It Too." A veteran financial journalist, she covers agri-finance for outlets like Global AgInvesting and the broader stock market and personal finance for 24/7 Wall Street. She began at CNBC and later helped launch Fox Business in New York. Gerelyn currently resides in Woodland Park, Colorado and dabbles in nature photography as a hobby.
