What Is a Non-Contributory Pension?
A non-contributory pension plan is a type of retirement plan that does not require employee contributions. Instead, the employer makes all the contributions, using a specific formula to determine the amount of the annual contributions. Typically, government regulations place limits on the total amount that the employer can place into a non-contributory pension each year.
Several factors can go into determining how much an employer contributes to a non-contributory pension each year. The number of years that the employee has been with the company will often play some role in determining that figure. In addition, the total salary or wages earned by the employee during that annual period may also play a role in calculating the amount of the contribution. There are typically provisions for the health of the employee as well. The formula will also take into consideration the current maximum amount of contributions allowed by the government and adjust the contribution for each employee accordingly.
One of the main benefits of a non-contributory pension is that the employee does not have to be concerned about withholding a portion of his or her paycheck in order to fund the pension plan. The total in the plan is relatively easy to track and makes it easy to determine how much money will be in the plan when the employee reaches retirement age. This is especially true if the employer makes wise choices in the investment of the proceeds in the non-contributory pension plan.
In general, a non-contributory pension plan does not include the opportunity to begin receiving benefits before the age of 65. This means that an employee who chooses to take early retirement is not likely to receive any disbursements from the plan for a period of several years if he or she elects to retire at age 55 or 62, even if the company allows retirement at those ages. For this reason, many employees who have non-contributory pension plans will choose to work up to the required age of 65, even if they have other retirement programs like an Individual Retirement Account or Individual Savings Account that they manage separate from an employer.
While a non-contributory pension is a relatively straightforward benefit for an employee, the process of managing this type of plan can be somewhat complicated for an employer. The need to remain within governmental compliance as part of the plan management is crucial and requires constant monitoring of any changes in regulations that could affect the operation of the pension plan. Plans of this nature can also be somewhat costly, especially when the general economy goes into a period of recession and the employer is generating less in the way of revenue that can be diverted into those pensions.
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