What is a pension?

A pension is an ongoing payment made toward a worker’s retirement from an investment fund. Both the employee and employer can contribute to a pension during the employee’s career.

What is an example of a pension plan?

A retired professional has an active pension fund during their 30-year career. The employee and employer contribute a certain amount a month, such as $150 per month per year. During retirement, the employee would receive $4,500 per month.

What are the benefits of a pension plan?

A pension has certain tax advantages and the promise of future financial security. Other benefits pensions provide employees with include:

• Funding compound returns
• Employers mostly fund pensions with employee contributions
• Employees have guaranteed income during retirement
• Employees do not need to invest and manage pension funds
• Employees can plan life after their career ends and know what their monthly payment will be
• Employees receive the payout for life

What is the difference between a pension and a 401(k)?

A 401(k) and a pension are both retirement plans sponsored by the employer that guarantee financial security and certain tax advantages. The main difference between the two funds are:

1. In a 401(k), the retired employee takes on the responsibilities of managing the balance. If the retiree spends all the money or if the investments lose value, it falls on the retiree.
2. A pension is paid out from a fund maintained by the employer. If the retiree lives to 120 years old, or the fund suffers investment losses, it’s on the company.

What are the cons of a pension plan?

For employees, pension plans have less market risk than 401(k) plans, but the former also has a few disadvantages:

• They’re inaccessible until the employee reaches or is close to retirement
• Employees don’t have control over their money (the employer and pension provider manage the pension)
• There is a risk of the company filing for bankruptcy, which would decrease pension benefits
• The employer controls the money until the employee retires, so there’s less stress for the employee

Can an employee have a pension and a 401(k)?

Yes, employees can have both a pension plan and a 401(k) plan at the same time. Generally, it’s more common for employees to have only one through their current employer (such as a 401(k)), with a pension plan through a previous employer.