The Basics of Pension Plans

A pension is essentially a non-profit fund from which a fixed amount of money is contributed throughout an employee’s employment tenure and through which monthly payments are paid to the individual for his or her retirement at work. The basic concept behind a pension is to ensure that people who have worked and contributed to the fund are not deprived of their retirement benefits at the time of retirement. The pension funds are generally invested by the employer in government bonds, stocks, real estate, and a variety of other financial assets. As the funds accumulate, the funds are distributed on a regular basis either as a lump sum or as fixed interest gils. A pension plan ensures that the employees have an adequate source of income when they stop working so that they do not become broke.

The two types of pension plans are the Defined Contribution Plan (DCP) and the Defined Benefit Plan (DDP). Both have their own advantages and disadvantages. An employee has to be of age to participate in a DCP while he does not need to be covered under an insurance contract in order to be eligible for the DDP.

The DDP and the DCP plans can be defined as retirement plans sponsored by employers. A number of companies offer public pensions, which are funded by contributions made by employees, but these plans are considered private pensions. In the US, the most common type of public pension system is the Thrift Savings Plan (TSP), which covers all employees and employers, regardless of gender, union membership, or age. TSPs run by state governments also exist in some states. Some employers offer both TSPs and DCPs. In general, public pensions are quite helpful for retired workers because they offer a guaranteed minimum level of income for the duration of their working lives.

The main feature of a defined-contribution plan is that the employee is not required to invest any money beyond the dollar amount he receives from his employer as a pension. That dollar amount is generally the difference between the regular monthly contributions and the employer’s portion. The money that an employee invests in the TSP is invested in securities of all kinds. It may be in stocks, bonds, or mutual funds. The main benefit of a this plan is that the employer makes the decision on what to invest the money in.

On the other hand, defined contribution plans let the employee decide what to invest his money in and how much of it to put into investments and what percentage to put into the pension. Like the TSP, if the employer matches the contributions, then both the employer and the employee will receive the full amount, as opposed to the lesser amount that would be received if the employee chose not to participate in the pension plan. The catch click here is that in cases wherein the market rises, the pension payout may be reduced. A good deal of research should be done before choosing between these two plans.

Another type of pension payout option includes the annuity. An annuity is usually a fixed amount given to the employee at retirement, with the provision that this payment would be available even without any efforts on the part of the owner. In return for this lump-sum payment, the employee is obliged to live up to the pension agreement provided.

Some employers prefer a combination of both the TSP and the annuity. This means that they invest a portion of their total employee pay into the pension fund and the rest into the annuity. While the former is a guarantee of the pension benefits, the latter gives them a certain percentage of their pension fund upon retirement. This can be helpful if there are significant losses in investments or if the market rises too sharply. This option has been made available by certain states in the US. Like the TSP, this option gives employees certain options they may not have otherwise.

All of these three options for pensions are quite useful for employees who need them. They all guarantee a guaranteed level of income for the employee upon retirement. This increases job security as employees would not need to rely on their job benefits to supplement their meager salaries. This is also a very important consideration for employers considering the rising costs of establishing a business and the risks of hiring someone who may not qualify for retirement benefits at all.