What is a Pension Plan?

A pension plan is a type of retirement plan that is set up by an employer to provide income for their employees once they retire. The main purpose of a pension plan is to ensure that employees have a source of income during their retirement years.

Types of Pension Plans

There are two main types of pension plans: defined benefit plans and defined contribution plans.

Defined Benefit Plans:

In a defined benefit plan, the employer guarantees a specific amount of income to the employee upon retirement, based on factors such as salary and years of service. The employer is responsible for managing the investments and taking on the investment risk.

Defined Contribution Plans:

In a defined contribution plan, the employer contributes a certain amount of money to the employee's retirement account, typically based on a percentage of the employee's salary. The employee is responsible for managing the investments and assumes the investment risk.

Benefits of Pension Plans

Pension plans provide a secure source of income during retirement, help employees save for the future, and can offer tax advantages. They also provide employees with peace of mind knowing that they will have financial security in their retirement years.