What Is a Pension?

What Is a Pension?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

A pension is a type of retirement plan where an employer sets aside funds for a worker’s post-retirement income. Pensions are different from retirement plans like 401(K)s, where employees make the contributions. In a pension plan, the company itself contributes money based on a formula that takes into account an employee’s salary and years of service. Employees receive these benefits as regular payments after they retire. These payments can be a fixed amount or can vary based on investment returns.

Related Questions

1. Who qualifies for a pension?

Employees of organizations offering pension plans qualify for pensions. Traditionally, public sector (government) jobs and unionized positions often provide pensions. Today, pensions are less common in the private sector, having been largely replaced by 401(K) plans.

2. When can you start receiving pension benefits?

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Typically, workers can begin receiving pension benefits once they reach the retirement age specified in their pension plan, usually around 65. However, some plans may offer early retirement options or require a later start date.

3. How are pension benefits calculated?

The exact calculation can vary, but typically it’s based on factors like your years of service, average salary during your employment, and a percentage factor determined by the plan.

4. What happens to my pension if I change jobs?

If you change jobs, you still retain your pension benefits from previous employers. However, you may need to re-invest these benefits to continue growing your retirement savings.

5. Can pensions run out?

In theory, yes. If the company managing your pension fails, or if the pension fund’s investments perform poorly, the fund could run out of money. However, most private pensions are insured by a government agency that will provide some benefits even if the fund runs out.