A Pension is a fixed amount of money that is paid to a person on a regular basis which normally follows retirement from a service. These can be set up by the government, insurance companies, employers and other institutions such as trade unions or employer associations, see this Origen FS article for details. The one given by the employer is known as employer or occupational pension and is usually a type of deferred compensation that benefits the employer as well as employee when it comes to taxes. Most of them also some with additional insurance as there are times when the benefits are paid to disabled beneficiaries or survivors.
Types of pensions
Retirement plans (employment based)
This is a plan that is arranged to offer individuals with income when they retire and are not longer getting steady income from their employment. Normally, the employers as well as employee have to contribute to this plan so that a person can get the defined benefits when the time comes. This allows tax free accumulation which is ideal for saving for funds that will be used for retirement income. Funding can be provided in different ways like from self funded schemes, labor unions and government agencies. There are some countries that extend this service to the military a process that is overseen by the government.
State and social pensions
There are very many countries that have created funds that are given to their residents and citizens to offer income when they cease being employed at a certain age and in some cases when they become disabled. This typically requires the citizen to make some payments throughout their working life so that they can enjoy the benefits later on. This means that the fund a person gets when they retire normally depends on a person’s contribution. There are some countries that have also facilitated social pensions. This is tax funded regular non contributory cash transfer that is given to older individuals. Some of these are universal benefits that are given to all the old persons regardless of employment record, assets or income.
There are some pension plans that are put in place to provide for the members if they suffer from disability. This can take the form of early retirement if a person becomes disabled before they reach their retirement age.
Retirement plans can be classified into defined contribution or defined benefit. The defined benefit plan usually guarantees that a certain amount of payout when a person retires. This is done according to a fixed formula that normally depends on the number of years a person has been a member of the plan as well as the salary/contribution of the member.
A defined contribution on the other hand normally offers a payout plan when a person retires that is dependent on the money that has been contributed as well as the performance of the investment vehicles that have been utilized. There are other types of retirement plans like cash balance plans which combine the features of both defined contribution and defined benefit plans. These are known as hybrid plans and examples include pension equity and cash balance plans.