A pension plan is a retirement benefit plan where an employer pays their employee a set amount once they retire or after the termination of their service. The amount will vary depending on the length of their service. 

At retirement, the employee can choose to receive a lump sum or to receive regular payments for life in the form of an annuity. 

Pensions reward longevity, so to receive the pension, an employee must put in the minimum time of service, otherwise they forfeit their right to the fund. 

Vesting of pension money can be in two forms: 

• Cliff Vesting: An employee has no claims to the pension fund unless they complete the specific years of service.
• Graded Vesting: A percentage of the pension fund is vested with the employee every year till it reaches 100%. 

CALCULATING YOUR PENSION 

If you have a pension fund, calculate it by: 

• Multiplying a fixed dollar amount with the number of years worked

 

• Using a formula that considers the employee's final year's salary, accrual rate, and total length of service with the company

Ameris also offers financial calculators to help you map out a plan. 

PUBLIC VS. PRIVATE PENSIONS

Pensions are typically more common in the public sector, which includes local, state or federal government bodies.  

Private companies that offer pensions are less common. These companies are legally required to ensure that they fund their pensions adequately. In addition, the Pension Benefit Guarantee Corporation will insure those pension funds. 

Public pension funds are not subject to such legal requirements, which can lead to severe underfunding, drastically reducing such benefits. 

PENSION PLAN VS. 401(K)

What are the differences between 401(k) and pension funds? 

Pension Funds

• Employees are guaranteed pension on retirement.
• Employer funds the account. 
• Employees have no control over the investment of the fund.
• Employees may choose to contribute to the plan..

401(k) Plan

• No guaranteed retirement benefits.
• Created by the employer, funded with deductions from the employee's salary.

 

• Employees choose their investment plans.

 

• Employers may match your contributions either partially or fully.

 

RISKS OF A PENSION PLAN 

A pension plan, being a retirement benefit, can have the following risks: 

• Since employees do not have control over the fund's investment, a bad investment by the employer can lead to insufficient funds at retirement.

 

• As pension funds are under the employer's control, they can change the plan's terms, which could lead to reducing the plan's benefits.

  

• While private pension funds have specific legal requirements, public pension funds do not. Bankruptcy or other economic issues from the government can make a dent in your retirement benefits. 

Published November 2022