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What is a Retirement Pension?

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  • Written By: Felicia Dye
  • Edited By: Melissa Wiley
  • Last Modified Date: 23 September 2016
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Retirement pension refers to a plan that is designed to distribute funds to individuals once they stop working. There are usually two distribution options, monthly payments or lump sum payouts. In either case, the funds are made available only once a person reaches a certain age.

A retirement pension is a plan that is managed by an employer during a person's working years so that she will have income once she retires. The source of the funds for the plan can vary. In some instances, all of the money is provided by either the company or the employee. There are also some plans that allow both parties to make contributions. This arrangement generally continues as long as the individual is employed with the company and eligible to be a participant in the program.

Once the funds are acquired, they can be invested in a variety of ways. The employer or a third party acting on an employer's behalf generally makes these decisions. An employee may be able to select certain options, but usually is not a primary decision maker. In some instances, the investments that are made will have an effect on the amount of money that the employee receives when she retires. In other instances, a person is entitled to a certain amount of money whether or not the invested funds grow or shrink.

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Whether a person receives her retirement pension in monthly payments or a lump sum distribution is usually a personal choice. It may be one, however, that is best made with the assistance of a financial adviser. If a person chooses to receive a lump sum distribution and does not have an adequate plan, she may be jeopardizing her future. On the contrary, monthly payments may not provide an individual with the freedom to invest as she would like. This can substantially limit a person's ability to increase her wealth.

Individuals who are currently employed and who have the potential to receive a retirement pension should take the initiative to acquaint themselves with their company's vesting policy. This refers to rules that determine the portion of pension benefits that a person will receive if she leaves the current employer. In many cases, if a person does not work for a minimum period and she leaves her employer, she will get nothing. If a person stays employed for the minimum period and then leaves, the rules can vary.

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