Pension Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of Pension, written in plain English, along with examples of how it is used.

What is Pension?

Tax-exempt fund that individuals contribute to, on a regular basis, that proves an income source after retirement.

History and Meaning of Pension

The concept of a pension is believed to have originated in the military, where soldiers would receive a retirement pension after years of service. Later, businesses and governments began offering pensions to their employees as a form of retirement benefit. A pension is essentially a savings plan that allows individuals to contribute a portion of their income on a regular basis, and then receive a regular income stream after retirement. Pensions may be funded by contributions from both the employer and the employee, and are typically managed by a third-party investment company.

Examples of Pension

  1. John has been working for a company for 30 years and is enrolled in the company's pension plan. When John retires, he will receive a monthly income from the pension plan based on his years of service and contribution amounts.
  2. Mary is self-employed and does not have access to a traditional pension plan. She instead contributes to an individual retirement account (IRA) on a regular basis, which provides similar tax benefits and allows her to save for retirement.
  3. The government of a certain country has a pension system that provides retirement benefits to all eligible citizens, regardless of employment status.

Legal Terms Similar to Pension

  1. 401(k) - A retirement savings plan offered by many employers in the United States.
  2. Annuity - A financial product that provides a fixed income stream for a specified period of time.
  3. Defined benefit plan - A type of pension plan in which the employer guarantees a specific retirement benefit to employees based on factors such as years of service and salary history.