A pension is a retirement arrangement in which an individual pays into a fund regularly during their working career, and from which periodic payments are made to support the persons retirement from work. The amount of the pension usually depends on how long the individual worked for an employer and their salary with that employer. There are two main types of pensions:
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Defined benefit plan: This is a pension plan where defined periodic payments are made in retirement, and the sponsor of the scheme (e.g. the employer) must make further payments into the fund if necessary to support these defined retirement payments.
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Defined contribution plan: This is a pension plan under which defined amounts are paid in during the working life, and the retirement payments are whatever can be afforded from the fund.
Pensions should not be confused with severance pay, which is typically paid as a fixed amount after involuntary termination of employment before retirement. Pensions are commonly created by employers for the benefit of employees and are referred to as occupational or employer pensions. Labor unions, the government, or other organizations may also fund pensions. 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.
