Pension Plan
Category: Retirement
Definition
A pension plan is a type of retirement plan where an employer makes contributions to a pool of funds set aside for a worker's future benefit. The pool of funds is invested on the employee's behalf, and the earnings on the investments generate income for the worker upon retirement.
Example
A government employee works for 30 years and is covered by a pension plan. Upon retirement, they are guaranteed to receive a specific monthly payment for the rest of their life, based on their salary and years of service.
Calculation / Formula
Pension calculations are often complex and are typically based on a formula using the employee's final salary, years of service, and a multiplier set by the employer (e.g., 2% * Years of Service * Final Average Salary).