Understanding Pension Plans

Understanding Pension Plans

Most pension plans are defined-benefit, guaranteeing workers a specific retirement payment based on their tenure and salary. The government usually backs these pensions through the Pension Benefit Guaranty Corporation.

These plans differ from 401ks, which are primarily funded through employee contributions. Pensions are typically paid in guaranteed monthly payments for life. Depending on the plan, they can also be passed on to a spouse or children.

Defined Benefit

In a defined benefit pension plan, your employer promises you a specified amount when you retire. The amount depends on several factors, including your salary and years of service. You can only draw your benefits once you reach the retirement age determined by the scheme’s rules.

This can be expressed as a specific dollar figure or based on a formula, such as your average salary over the last ten or fifteen years of employment. It may also include the value of benefits such as a company car or private medical insurance.

Your employer funds this plan by contributing a fixed percentage of your pay into a pool, which an actuary invests. The actuary also calculates the benefits you will receive when you retire based on your earnings history and years of service. You can receive your benefits as a monthly payment or as a lump sum.


Many people ask whether or not they can inherit a pension. It depends on the Boeing pension and payout options a person chose when they signed up for the pension scheme.

For example, if they chose a “single-life” option where the monthly payments of a fraction of their highest or most recent annual salary only start when the person retires and stop when they die, then the pension will only be paid to their spouse (if they have one) or children.

However, if they choose the “joint-life” option, the pension payments will be split between their spouse and their children or to whom they wish to leave them. This is a discretionary decision that the pension scheme’s trustees will consider. This payment type won’t usually be included in their estate for inheritance tax purposes. Nevertheless, it’s always best to consult a financial adviser about this. They can explain the different inheritance tax rules and provide personalized advice.

Defined Contribution

Unlike defined benefit pension plans, the amount you get when you retire from a defined contribution plan depends on how much you put into your pension pot, how well the investments grow, and your longevity. These investments are usually made through professionally managed funds.

With this plan, you and your employer contribute to a fund invested in stocks and other assets. When you retire, your retirement income is based on the balance in your account plus investment returns and tax relief.

There are many defined contribution plans, including profit-sharing, money purchase, individual stock option (ESOP), and two kinds of plans popular with small businesses: SIMPLE IRA plans and SEPs. Your plan administrator should provide you with a Summary Plan Description. This document includes information in plain language on essential features like how the pension plan works, when you’re eligible to participate, and when you become vested. You’ll also receive a Summary of Material Modifications when significant changes to the plan occur.


Pensions are generally taxable; in many cases, you will pay state income taxes and federal ones. However, some states don’t have income taxes, and others tax pensions differently.

You have defined benefit pension plans work by guaranteeing a specific amount of retirement money based on your years of service with the company and a formula that factors in your salary and other variables. These plans require the sponsoring employer to have enough assets to cover your benefits during a shortfall.

Because of the risk-defined benefit pensions pose to companies, they are subject to actuarial loss limits. As such, these limits may influence a company’s decision to offer a defined benefit pension plan and how much it contributes to the fund each year. This can also affect a worker’s ability to choose a lump sum distribution or an annuity. For this reason, it is essential to set up the right amount of tax withholding from your pension payments and to check them regularly.