Types of Pension

A pension is a form of stable income provided to an individual commonly after his retirement. The payments of pensions are usually done in the structure of a secured annuity to a disabled or retired worker. There are different types of pension plans that are implemented in various countries of the world.

A number of superannuation plans or retirement plans are also known as pensions and these types of pension usually involve accumulation of a cash balance with the help of a wide range of procedures and tools, which a retired person may withdraw at the time of his retirement, instead of the anticipated payments of annuity. In both instances, a pension plan, which has been designed by an employer for the advantage of its employees, is generally termed as an employer pension or occupational pension. Funding of pensions is also done by the government, labor or trade unions and other types of institutions.

The occupational pension is a type of deferred compensation. This is commonly beneficial both to the employer and the employee for tax purposes. A large number of pension schemes also include the characteristics of insurance policies as these policies frequently offer financial assistances to disabled recipients of benefit or survivors. At the same time, the income received from annuity provides protection from the risk of longevity.

As different types of financial instruments such as an annuity or specific lottery disbursements can offer same types of payments or income flows, the term pension is usually applied for defining the payments that an individual gets after his retirement and this generally happens according to pre-defined contractual and legal rules and regulations.
Superannuation plans or retirement pension plans
According to this system, the employer (such as a governmental agency, a labor or trade union or a corporation) offers income to its workers after they retire. This is regarded as a type of deferred compensation and this has become quite famous in the U.S.

The pension plans can be widely categorized into two forms: Defined contribution plans and defined benefit plans. Both types of pension plans have become highly popular in the United States.

A number of plans have been formulated in the United States, which carry the features of both defined contribution plan and defined benefits plan and they are frequently termed as hybrid plans. Examples of hybrid plans are pension equity plans and cash balance plans.
Defined benefit plans
A defined benefit plan is a form of pension plan according to 26 U.S.C. 414(j), which is not a defined contribution plan. A conventional pension plan, which specifies a benefit for a worker after the retirement of the worker, is known as a defined benefit plan.

The advantages offered in a defined benefit plan are calculated with the help of a formula, which contains the years of service of the employee, his pay, his retirement age and a number of other elements. A common example of a defined benefit plan is the final average plan available in the United States. The United States Social Security infrastructure has some resemblances with the defined pension benefit plan. These plans are secured by the Pension Benefit Guaranty Corporation in the United States.
Defined contribution plans
A defined contribution plan is such a plan, which deals with individual accounts. The legal explanation of this plan represents it as a plan, which offers an individual account for every subscriber. The advantages are calculated exclusively on the basis of the amount of contribution to the individual account, adding or deducting profits, expenditures, earnings, or losses apportioned to the account, according to 26 U.S.C. 414(i). Examples of this kind of plans are 401(k) plans, IRAs or Individual Retirement Accounts in the U.S. and the Individual Pension Plan in Canada.
Hybrid and Cash Balance Plans
A hybrid plan has the aspects of both defined contribution plan and defined benefit plan. Usually, they are regarded as defined benefit plans for accounting, regulation and taxation purposes. The cash balance plan is a common form of hybrid plan.

The pension systems applied in different countries can be categorized into the following types:
Kansanel kelaitos (Finland)
Canada Pension Plan
Social Security (public pensions) (Australia)
Superannuation in Australia (private occupational pensions)
Social security (Sweden)
Indian pension system
Social security (basically social insurance, not a pension) (United States)
Retirement plans in the United States
Self-invested personal pensions (United Kingdom)
Turkish Pension System
UK pension provision
The pension systems in the United Kingdom are as follows:
Political pension
Hereditary or perpetual pension
Municipal and judicial Pension
Army pension
Royal Navy pension
Civil list pension
Ecclesiastical pension

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Last Updated on : 1st July 2013

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