Pension Plan

Pension plan

A fund that is established for the payment of retirement benefits.

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pension plan

An arrangement for paying death, disability, or retirement benefits to employees. Payments into the plan are ordinarily a tax-deductible expense for the firm, but any contribution by employees may or may not be deductible on personal tax returns. Likewise, retirement benefits paid to employees will be wholly or partially taxable. Compare vested benefits. See also defined-benefit pension plan, defined-contribution pension plan.

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Pension Plan

A fund, usually an annuity, that one buys in order to pay for expenses following retirement. One may purchase a pension plan independently or through one's employer. Generally speaking, one makes contributions into the pension plan throughout one's working life, and then begins making withdrawals after retirement. Ordinarily, the annuitant may choose a plan in which either the contributions are tax-deferred or withdrawals are tax-exempt. If the annuitant begins withdrawals before a certain age, withdrawal penalties apply.

One common type of pension plan is a defined-contribution plan, in which the annuitant must make a certain contribution each month. Another is a defined-benefit plan, in which the annuitant is guaranteed to receive a certain amount each month after retirement, regardless of the performance of the portfolio in which the contributions have been invested. Some plans combine features of the two.