What is Pension?

A pension is a retirement plan where your employer guarantees you a set monthly payment for life after you retire. Unlike defined contribution plans (such as 401ks), where the employee bears the investment risk, the employer bears the investment risk and is legally responsible for funding the pension. Pension benefits are typically calculated using a formula based on the employee's years of service, age, and final average salary.

Pensions are governed by the Employee Retirement Income Security Act (ERISA) of 1974. Under ERISA, most private-sector defined benefit plans are insured by the Pension Benefit Guaranty Corporation (PBGC), a federal agency. If a pension plan sponsor goes bankrupt or is unable to pay promised benefits, the PBGC steps in to pay guaranteed benefits up to statutory limits, protecting retirees.

Pension benefits are usually paid as a monthly annuity for life, though some plans offer a one-time lump-sum distribution. Most pension income is subject to federal income tax at ordinary rates when distributed. In public sectors (government, military), pensions remain a core component of employee compensation.