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What Is a Pension Plan?

A pension plan is an set up wherein a person will continue to receive income on a regular basis even though he or she has stopped being part of the workforce. In general, a pension plan pays out the income in monthly installments over a long period of time, instead of merely paying out a lump sum. When a person retires, he or she can go on receiving money if a pension plan is in place. While a pension is normally associated with retirement, a person may also receive pension if he or she is taken out of the workforce due to an illness, an injury, or some other reason.

The types of pension plans may differ depending on the country. In general, however, there are three kinds of pension plans: employment-based pension plans, social and state pension plans, and disability pensions.

Employment-based pension plans usually require both the employer and the employee to make contributions. These contributions will placed in a fund that will be paid out to the employee come retirement time. Employees may also take out private pension plans to fund their retirement.

Social and state pension plans exist courtesy of the provisions made by the government. In this set up, citizens must make contributions over the course of their working life, and upon retirement, will receive a pension based on the number of contributions made.

Disability pensions are actually a subset of the first two kinds. If a person suffers from a debilitating injury or illness before he or she reaches retirement age, pension can be given out, depending on the specific provisions of his or her plan.

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