Also found in:DictionaryThesaurusMedicalLegalIdiomsEncyclopedia.Aretirementplan in which an employer makes acontributioninto an account each month. The contributions areinvestedon behalf of anemployee, who may begin to makewithdrawalsafter retirement. Typically, pensions aretax-deferred, meaning that the employee does not pay taxes on thefundsin the pension until he/she begins making withdrawals. Pensions may have defined contributions, defined benefits, or both. See also:401(k)IRA.

A pension is an employer plan thats designed to provide retirement income to employees who have vested — or worked enough years to qualify for the income.

These defined benefit plans promise a fixed income, usually paid for the employees lifetime or the combined lifetimes of the employee and his or her spouse.

The employer contributes to the plan, invests the assets, and pays out the benefit, which is typically based on a formula that includes final salary and years on the job.

You pay federal income tax on your pension at your regular rate, so a percentage is withheld from each check. If the state where you live taxes income, those taxes are withheld too. However, youre not subject to Social Security or Medicare withholding on pension income.

In contrast, the retirement income you receive from a defined contribution plan depends on the amounts that were added to the plan, the way the assets were invested, and their investment performance.

The way a particular plan is structured determines if you, your employer, or both you and your employer contribute and what the ceiling on that contribution is.

a payment received by individuals who have retired from paid employment or have reached the governments pensionable age, in the form of a regular weekly or monthly income, or as a lump sum. There are three main types of pension scheme:

operated by he Government, whereby the employee paysNATIONAL INSURANCE CONTRIBUTIONSover his working life, giving entitlement to an old age pension on retirement of an amount considered to provide some minimum standard of living. State pensions may be based on earnings or may be a flat rate, or combination of the two. SeeDEPARTMENT FOR WORK AND PENSIONS;

operated by private sector employers whereby the employee and the employer each make regular contributions to aPENSION FUNDorINSURANCE COMPANYscheme, the pensioner then receiving a pension which is related to the amount of his contributions (annual contributions x number of years worked).

defined benefit, where the pension is linked to final salary. Here the employer is liable to make up any shortfalls in thePENSION FUND. This type of scheme is also known as a final salary scheme.

defined contribution, or money purchase scheme, where the size of contributions but not the final pensions benefits are fixed. The size of pension benefits are determined by the investment performance of the fund. The employee rather than the employer bears the risk.

In the UK there is a shift from defined benefit to defined contribution schemes, because of employer fears about their future liabilities;

operated by insurance companies, pension funds and other financial institutions which provide customized pension arrangements for individuals depending on their personal circumstances. Since a PPP scheme is not tied to a particular employer the problem of transferring pension rights should the person move jobs is much reduced. A recent innovation in the UK is the stakeholder pension, aimed at low and medium income earners who work for employers who do not already have an occupational scheme. Employers with more than 5 employees are obliged to designate a stakeholder pension provider for their workforce but they are under no obligation to make contributions to the scheme. Nor are employees obliged to subscribe. Approved providers of stakeholder pensions are required to levy low charges to participants. SeeCONTRACTING OUT.

a payment, received by individuals who have retired from paid employment or who have reached the governments pensionable age, in the form of a regular weekly or monthly income or paid as a lump sum. There are three main types of pension scheme:

operated by the government, whereby the employee paysNATIONAL INSURANCE CONTRIBUTIONSover his or her working life, giving entitlement to an old-age pension on retirement of an amount considered to provide some minimum standard of living;

operated by private sector employers, whereby the employee and employer each make regular contributions to aPENSION FUNDorINSURANCE COMPANYscheme, the pensioner then receiving a pension that is related to the amount of his or her contributions (annual contributions x number of years worked);

(PPP), operated by insurance companies, pension funds and other financial institutions, that provide customized pension arrangements for individuals depending on their personal circumstances. Since a PPP scheme is not tied to a particular employer, the problem of transferring pension rights should the person move job is much reduced.

Payments made periodically of (generally) a definite amount for a specified period (usually life) from an employer-funded plan to workers who have met the stated requirements. Its primary purpose is to provide retirement income.

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