An occupational pension is a specific percentage of money paid to an employee, or their dependents, as a replacement of their regular income. It is organized and managed by the employer and paid when the employee is no longer working. There are different types of pension plans used around the world, such as contributory, non-contributory, defined benefit or defined contribution. With a contributory pension, benefits are paid by the employee and the employer, whereas the non-contributory pension includes the contribution made by the employer only.
The two basic types of occupational pension plans are the defined benefit and the defined contribution. The defined benefit involves knowing the exact pension amount before retirement. This pension plan is determined with reference to the pensioner’s earnings, period of service, and other various details. It is the process by which the employee knows in advance about what he or she is going to get after retirement. Moreover, in fixed or defined benefit pension plans, the contribution may tend to vary to balance out the levels of the benefits.
On the other hand, the defined contribution occupational pension scheme, as elected by the employer, if funded by making defined contributions and in this way, the employee can have a sufficient sum of money built up to retire on. Basically, in this plan, the employee or the pensioner, doesn’t know the exact amount that he or she would get in the end. The contribution remains constant as per the requirements of the contract.
Although it has so many advantages and positive aspects, there are still a few flaws and drawbacks that can be associated with an occupational pension. Since each scheme is determined by the employer, if they have chosen a defined benefit plan for the employee, then the amount added every month into the fund may not be agreeable to the specific employee.
The occupational pension plan has a huge impact on the future savings of the employee. This is the reason that a good understanding of the pension features and how it works is an aspect that every employee should take time to understand. They seek the advice of a financial planner who can explain the specific pension plan and how it will affect the employee in the present, and the future.
