A pension plan is a specific type of retirement plan in which the employer will make a contribution to funds that have been put aside for the employee’s future benefit. This money is then invested on behalf of the employee permitting benefits to be received at retirement. As a general rule, a pension plan is tax exempt, is built up over numerous years, and consists of money that was contributed by both the employer and the employee.
How Do I Get a Pension Plan?
A pension plan comes with the job. All you have to do is show up to work and work. When you become an employee, you are enrolled in the pension plan with your employer automatically. However, some companies do require that you are employed for a full year before you are officially enrolled in the pension. And just because the pension is yours does not mean that you have any say so in the investment decisions.
When Can I Have Access to My Pension?
You cannot obtain early access to your pension plan. You will be unable to gain access to the funds from your pension until you have retired from the company. As a general rule, retirement age is 65; however, some companies may allow you to begin payments at 55 for early retirement. If you choose to begin receiving early retirement benefits from your pension, you won’t receive as large of a monthly payment as you would if you were at full retirement age.
Upon retirement, you will begin receiving monthly installments of the same amount each month until the funds have been depleted. The payout will generally depend on your length of time with the company as well as your salary.
What to Know About Pension Payouts
When you do begin receiving payments from your pension plan, you will be responsible for paying taxes on the funds received throughout the tax year. Because of this, a pension plan is considered as a form of a retirement plan.
Now, while most individuals opt for the monthly installments, those with a pension plan do have the option to choose a lump sum payment upon retirement. However, by choosing the lump sum option, you are given all the funds at once meaning that taxes must be paid on the entire amount at the end of the tax year. In addition, you could leave yourself with no money in the long-term by spending too much upfront. The wiser option is the monthly installments; however, the choice is ultimately yours to make.
Don’t Rely on a Pension Alone
When it comes to planning your retirement, you should never rely on one individual retirement plan to carry you through your retirement years. This is extremely true with pension plans since a pension is not going to be enough to carry you through.