What Is a Pension?

A pension is a defined benefit retirement plan in which an employer promises a fixed, regular payment to retirees based on factors like salary history and length of employment. It differs from defined contribution plans like 401(k)s, where benefits depend on investment performance.

Key Points

• Defined benefit: You receive a set monthly payment after retirement, often for life.
• Employer-funded: Most pensions are primarily funded by employers, though some require employee contributions.
• Formula-based: Payments are usually calculated based on a formula involving your final average salary and years of service.
• Vesting: You must work a certain number of years to become eligible to receive pension benefits.
• Decline in private sector: Pensions are less common in private companies today but still prevalent in government jobs.

FAQ

• Can you lose a pension? Not if you’re vested, but underfunded plans may face payment issues.
• Is pension income taxable? Yes, most pensions are taxed as regular income when paid out.
• What happens if I leave early? You may lose unvested benefits or receive a reduced payout.