What Is A Pension Plan?
A pension plan is any type of plan created to provide a worker with a steady and reliable source of income after he retires. Pensions can be provided by the company that employs the worker or, in countries with strong socialist policies and comprehensive welfare programs, by the state itself. There are different forms of retirement investments that differ based on the amount they give back to their participants, and according to who is taking the investment risks: the employee or the company. Which one is better depends on what the employee is looking for: a fixed amount of income for his retirement, or an opportunity to invest his retirement money the way he sees fit.
RETIREMENT PLANS AND THEIR BENEFITS
Retirement Plans, more commonly known as pensions, are plans that take a fixed amount of the employees salary every month and adds it to the pension fund. Much as in like a bank, the company uses the employees’ money to make their own inversions and pays back a small fee to the employee’s account for using his money. The benefits of pensions are that when somebody starts a retirement plan he can be sure that when he retires he will have the same amount of money that the company promised him when he signed up for their plan because pensions work as “Defined benefit plans”, which means that the monthly income to his pension account has been pre-established and can’t be changed.
SAVINGS PLANS AND THEIR BENEFITS
Saving Plans work the opposite way than pensions because they give the employee the power to decide how to invest his money. Saving plans don’t guarantee minimum or maximum benefits, and therefore the employees assume the risks of investments on contribution plans that are already defined by the company. Saving Plans are increasingly displacing pensions because they allow both employees and employers greater flexibility when managing the savings. An employee with a 401(k) plan can easily work for another company and keep contributing to it, but if he has a pension he has to stay in that company until he retires because pensions are designed for employees who serve many years in the company.
WHO ARE EXCLUDED FROM PENSIONS?
In every country the state defines which is the retirement age for its workers. To be able to collect their pensions employees must be vested, which means that they must have worked a number of years before they are able to have any rights over their pensions. Even then, an employee can only start making use of his money once he reaches the age when he can start making early retirements (55-62 depending of the country). Getting terminated can ruin your hopes of ever using your pension money. If you haven’t been with the company for long you might loose all your benefits if you are not vested.
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