Pension

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A Pension is a benefit paid to people retired after their employment. Two major types of Pensions exist, Defined Benefit Plans, and Defined Contribution Plans.

Defined Benefit plans provide a known amount to the retiree. The pension benefit is usually based as a percentage of the employee's last year of work or average of some 3 to 5 last years of work. While such pensions are still common in the public sector they are rapidly disappearing from corporate America.

Defined Contribution plans are tax deferred savings plans whereby an employee can save money towards his or her retirement. This saved money plus the investment income earned thereon becomes the basis of the retiree's post retirement income. Many companies will assist employees by adding company funds to the employee's contributions. These plans are often known by the section of the IRS code that allows them; 401(k).

An important distinction between the two types of plans is that defined benefit plans are not portable. Changing jobs before retirement age will always result in a greatly reduced pension. Such restrictions do not normally apply to defined contribution plans provided the employee has vested.

Social Security Plans can supplement the Pensions of individuals, in addition to other savings that a person may have to fund retirement living.

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