What’s a pension plan?

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A pension plan is a financial arrangement that allows people to continue receiving some type of regular income even after they are no longer active in the workforce. Pensions are often used as retirement plans, although it is also possible to receive a pension for disability or other circumstances. One of the common features of a pension plan is the fact that income payments are disbursed to the recipient over a period of time, usually in a series of equal monthly installments.

The concept of a pension plan is found in many different countries. In the United States, the terms retirement plan and pension plan are used interchangeably, even though a pension does not necessarily have to be related to retirement. Similarly, the same type of financial arrangement is generally known as a pension plan in the UK and some parts of Europe, while the plan is known as a superannuation in a number of other countries.

The pension plan should not be confused with a severance package. With severance benefits, the individual typically receives some form of lump sum settlement that is immediately taxable. By contrast, a pension account is built up over several years, often without interest while the plan is being funded. At the time pension disbursements begin, the beneficiary pays taxes on all payments received during the tax year, but not on the remaining balance in the plan.

Plans of this type may be offered through an employer or as part of benefits offered by a government. Employer-based pensions tend to involve contributions made by both the employee and the employer over several years. When the employee retires from the company, monthly payments are made from the pension fund to the retiree, creating a steady stream of income for use during the retirement years.

Governments also sometimes create and maintain a pension plan program for their citizens. With this model, deductions from wages and salaries over the years are credited to the taxpayer’s pension account. Upon reaching what is considered a legal retirement age, the individual can request and begin receiving monthly payments, with the amount of the payments based on the individual’s level of earnings during their working life. In the United States, this type of pension plan is operated by the Social Security Administration.

A disability pension plan is also a means of providing income to people who are physically or mentally unable to function in the workplace. This provision can be included in an employer-based pension plan, as well as part of a government-administered pension plan. In both situations, if the individual is deemed by qualified medical professionals to be disabled and therefore unable to work, the disability pension becomes active and provides the individual with a source of income.

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