What Is Pension
An employer sets aside a part of the pay for his employee, to be accessed by the employee after retirement. This is to help the employee in the future. This pool of money is invested and the returns earned on it are also enjoyed by the employee, after retirement.
Some fund houses allow both the employer and the employee to contribute towards this fund. The employee can pay up a part of his income towards this fund and his employer can match it or match up to a percentage of the annual contribution.
Types Of Plans
The different types of pension plans are:
- Defined Benefit Plan
In this type of a pension plan, the employee is guaranteed by the employer, that he will get a fixed amount on retirement, irrespective of the performance of the investment pool or the returns earned from it. Once the employee retires, he is eligible to get a fixed amount on a regular basis, from this investment pool. However, if the investment does not earn enough or is not sufficient to pay out the required amount, the company has to match up the difference.
- Defined Contribution Plan
The employer invests for the employee matching up the employee’s contribution, at varying degrees. Here the final payment made to the employee on retirement depends upon the performance of the investment. The company is liable only up to the amount to be paid as contribution to the pool. Once these contributions are made, the company’s liability ends. More companies are moving towards this plan and ending the traditional pension plans, as the liability is lesser and if the investment returns are not sufficient, the company need not pay for it.
How Do These Pensions Help
When a company invests for the employee, it is ensuring the employee has enough funds to lean back up on once he retires. When the active earning days are over, many suffer due to inadequate income and inability to save up for a secured future. When part of the income is set aside on a regular basis, it automatically brings down the spending and increases the saving.
There are instances where an employee retires richer than what he was when he was actively earning. This is because the contributions made by both the employee and employer can earn good returns and result in a high payout. If such investments are made from the start, the investment tends to accumulate and grow until the employee works in that company. Sometimes, the employee from a lower level, earning lesser than many in the company can retire much richer than his boss. It is like how regular use of Fresh Fingers can get one fresh smelling feet for longer hours than the feet that are washed constantly.
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