Pension, Pensions

A pension is defined as a private or government fund, from which benefits or allowances are paid to a person upon his or her retirement from service or when s/he is unemployed due to disability.

In various public or private employment-based pension plans, the employer regularly contributes a percentage of the employee’s earnings to an individual plan account made in the employee’s name. Employee contributions, if required, are also credited to the pension plan account.
Often, pensions are paid if and only if the employee attains a certain age or if s/he completes a certain length of service.
Pension: Types of pension plans

Pension plans became popular in the US after WW II, when the freeze on wages prohibited an increase in workers’ compensation. Pension plans can be divided into two categories:
·        Defined benefit plans: This type of pension plan defines the benefit for an employee upon his or her retirement. The benefits are calculated by taking into account the employee’s pay, years of service, age of retirement, and other factors. In the United States, the average salary over the last five years determines the pension amount. In the UK, pension benefits are indexed for inflation. Pensions can also contain social security contribution, as determined by government regulations.

Defined contribution plans: A defined contribution plan is generally defined as a plan for providing an individual account for each employee, and benefits for which s/he contributes to the account. The contribution may be invested in the stock market, the returns of which are given to the employee upon retirement. Typical examples of such pension plans are the 401K and Individual Retirement Accounts (IRA).

There is also a hybrid plan, which combines the features of both pension plans. This plan is usually used as a pension benefit plan for tax, accounting and regulatory purposes. Hybrid plans are more flexible and portable than traditional pension plans, where the employee’s balance grows by a defined rate of interest and employer contribution.

Pensions are wonderful methods to lead a comfortable and secure life after work. Regular income is guaranteed with benefits, ensuring that you do not need to rely on anyone else for your everyday needs. To achieve maximum returns on a pension account, it is always advisable to seek the expert, unbiased opinion of a registered financial advisor.