A pension is a financial arrangement to provide people with an income when they are no longer earning a regular income from employment. A recipient of a retirement pension is commonly known as a pensioner or retiree.
Retirement plans may be set up by employers, labour unions, government agencies, self-funded schemes, or government agencies or other institutions such as employer associations or trade unions. If created by an employer for the benefit of an employee, it is commonly referred to as an occupational or employer pension. Occupational pensions are a form of deferred compensation, usually advantageous to employee and employer for tax reasons. Many pensions also contain an additional insurance aspect, since they often will pay benefits to survivors or disabled beneficiaries.
Types of Pensions
Employment-based Pensions Most employment based plans require both the employer and employee to contribute money to a fund during their employment in order to receive defined benefits upon retirement. This method offers tax-free accumulation. These plans can be referred to as "deferred compensation".
Social and State PensionsMany countries have created funds for their citizens. Typically this requires payments throughout the citizen's working life in order to qualify for benefits later on. A basic state pension is a "contribution based" benefit, and depends on an individual's contribution history.
Defined Benefit v. Defined ContributionA defined benefit plan calculates benefits using a fixed formula that typically factors in final pay and service with an employer, and payments are made from a trust fund specifically dedicated to the plan.
The payout is dependent upon both the amount of money contributed into an individual account and the performance of the investment vehicles utilized.
Some types of retirement plans, such as cash balance plans, combine features of both defined benefit and defined contribution schemes.
ChallengesA common challenge among countries is the ageing populace. As birth rates drop and life expectancy increases an ever-larger portion of the population is elderly. This means less funding for pension programs, and more people needing the funds.
This challenge has recently been compacted by the global economic downturn. Many countries are struggling with huge deficits and are needing to make changes to their entire economic system, including how they take care of their retirees. This had led to protests and debate by the people as the minimum age for retirement is raised.
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