My younger sister recently asked me about pensions. My first question was really if they even exist anymore. In some cases, they do and they’re a great benefit from an employer. So what is it?
A pension is an amount paid to a retired employee. These are set up by the employer and often managed through a third-party as an investment pool. This pension provides employees with a steady income after retirement from said company. Not all companies offer pensions.
Pensions defer taxes which means the employee will be taxed upon receipt of the money in the future. Employers contribute money to a pension fund for an employee’s future benefit. There are two types of pension offerings, a defined-benefit plan and a defined-contribution plan.
With defined-benefit, the employee is guaranteed a fixed amount of money upon retirement each month. With a defined-contribution, the employer determines the contribution amount for each employee but the benefit is based on how the pension (and investment) does over time.
Does your company offer a pension? Do you know which plan your company offers?
What’s the difference between a pension and a 401K? Do I need both? Which one is better? What are the benefits of one over the other? Thanks for the info on pensions though, didn’t realize that so few companies were using them anymore! Glad mine still offers it!
Often you’re not given a choice about whether you have a pension. Either your employer offers it or they don’t. If you’re given a opportunity to contribute to a 401K and your employer will match, contribute at least up to the match so you don’t leave free money on the table. This is money they want to give you. A 401K is another tax-deferred account, so your contribution comes out before taxes, lowering your taxable rate now. You will have to pay taxes on it in the future, when you take money out for retirement.