What is a pension plan?
A pension plan is a retirement account that is sponsored and funded by your employer. That means that it is your employer’s responsibility to contribute funds to your retirement pool. These earnings are then set aside so that you’ll receive a guaranteed monthly income during retirement — not a bad deal if you ask us.
A pension plan, simply put, is a savings plan. It enables people to put aside money each month to have an income when they stop working. The payments are often tax-deferred. Instead of paying tax on the income as you earn it, you’ll pay the tax when you receive it after you’ve retired.
Because your income will be lower when you no longer work at a regular job, your tax rate will also be lower too, enabling you to keep more of your money.
Lowering your tax rate may sound strange, but the government wants to encourage you to save for your retirement. The government wants to be sure that that you’ll be able to look after yourself when you retire so that they won’t have to do the job for you.
The pension payments you make go to an investment firm. That firm uses these funds to buy a portfolio of bonds and stocks. Managed by professional investors, the funds grow and earn compound interest over the years so that a retiree will have a sizeable sum when they stop working.
Pensions make up one of the biggest areas for investment. According to the OECD, pension funds held more than $32 trillion in 2019. Most of that money, nearly $19 trillion, is held in the U.S. When you hear about movements in the stock exchange and in the money markets, much of that money is funds that will one day go to retirees.