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What is a Pension Plan?

Malcolm Tatum
Updated May 16, 2024
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A pension plan is a financial arrangement that allows individuals to continue receiving some type of regular income even after they are no longer active in the workforce.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 based on disability or other circumstances. One of the characteristics that is common to 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 connected with retirement. In like manner, the same type of financial arrangement is usually referred to as a pension scheme in the United Kingdom 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 usually receives some type of lump sum settlement that is subject to taxes immediately. By contrast, a pension account is built up over a number of years, often with no interest incurred while the plan is being funded. At the time disbursements from the pension commence, the recipient pays taxes on all payments received during the tax year, but not on the balance remaining in the plan.

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

Governments also sometimes create and maintain a pension plan program for its citizens. With this model, deductions from wages and salary over the years are credited to the pension account of the taxpayer. Upon reaching what is considered a legal retirement age, the individual can apply for and begin receiving monthly installment payments, with the amount of the payments based on the income level of the individual over his or her 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 supplying income to individuals who are not physically or mentally able to function in the workplace. This provision may be included in an employer-based pension plan as well as part of a government-operated pension scheme. In both situations, if the individual is deemed by qualified medical professionals to be disabled and thus unable to work, the disability pension activates and supplies the individual with a source of income.

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Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.
Discussion Comments
By BambooForest — On Feb 05, 2011

There are still pension plans for some professions, mainly those for people who are considered civil servants. For example, teachers often receive pensions through their unions or their school systems. People working for the military, law enforcement, or emergency care like fire fighting can also get pensions of some kind, usually.

By panda2006 — On Feb 02, 2011

These days many financial experts have re- defined pension plans as a more personal act, what each person does to make sure that he or she has enough money to retire into the type of lifestyle that is desired. While many businesses do limit how much they can offer workers towards their pensions, individuals can still do much to improve their future with savings, both in the bank and in things like stocks and savings bonds. Generally the best pension savings plan includes a mix of private bank savings and public stock savings, which are riskier but offer better returns if things go well.

By Moldova — On Jan 05, 2011

A pension retirement plan used to be what many businesses in the 1950’s used as a retention tool in order to reduce employee turnover.

However, most companies with the exception of a few have replaced the employee pension plan with a 401 K instead in which the employee contributes to their own retirement and the company may offer a small matching benefits of 3% to 6% of the initial contributions.

Many companies went in this direction because the sheer expense of paying a non productive worker made it difficult for the company to compete financially.

For example, General Motors is saddled with over five billion dollars in pension payments alone when you figure that companies like Toyota and Nissan have no pension payments to make at all.

This is why all pensions have to go because they are too expensive to maintain. Many public sector pensions are undercapitalized which is why the government is looking to raise taxes to help these union pensions which seems really unfair to the American people.

Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
Learn more
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