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FAQ About Pension Plans

FAQ About Pension Plans

February 26, 2021

A pension plan is a retirement plan where an employer is required to make contributions to a fund set aside for an employee. The money in the fund is invested on the employee’s behalf. There are several different types of pension plans and different stipulations with each one. With pension plans being complicated, questions are bound to come up. Keep reading to have a few of your questions answered! 

What are the types of pensions? 

There is a defined-benefit plan and a defined-contribution plan. With a defined-benefit plan, the employer commits to providing an employee with a specific amount of benefit upon retirement, no matter how the investment pool does. A defined-contribution plan has employers make certain plan contributions for the employee that matches the contributions made by the employee. 

Why are there public and private pensions?

Public pensions are for federal, state, and local government employees, including firefighters and teachers. Private pensions are from private companies. Most companies do not provide private pensions anymore or have frozen their pensions so employees cannot receive them. There is a lack of legal protection in public pensions which makes them extremely underfunded.  

What’s the difference between a 401(K) and a pension?

401(K)s are the common type of retirement plan in the private sector. A 401(K) is a defined contribution plan when money is withheld directly from your paycheck and deposited into an investment account. With a 401(K) the money belongs to the employee but with a pension the money is put into a company pension fund. 

How are pensions calculated? 

Pension contributions are based on how long the person has been an employee and their average salary. The higher the salary and the longer they have been an employee, the larger their pension amount will be.

Can I still receive Social Security benefits if I have a pension? 

You may receive only partial benefits or no benefits at all if you have a public pension from a government employer. A person with a public pension does not pay into Social Security taxes so they do not receive full benefits. 

Are pension plans risky?

All retirement savings plans have risks but pensions are riskier than 401(K)s and IRAs. With pensions, you do not have any say in how the money is invested. If the pension manager makes poor decisions, your benefits can be majorly reduced. Another risk is your company can change the terms of the pension without your consent. 

Are pensions taxable? 

Employers receive a tax break on what they contribute on behalf of their employees. Once the employee retires and begins to receive pension payments, the employee will have to pay federal and state taxes on the pension payments.  

With pensions not being a common practice anymore, it can be quite confusing. If you have a pension, be sure to understand all the aspects of your retirement savings. 

If you have any questions about your pension plan, schedule a meeting with us or give us a call at (713) 527-8998.