Private Pension

 

 

A private pension is a steady income given to a person after retirement from employment.  They are usually payments in the form of annuities to retired or disabled persons. Private pensions are also created by employers for their employees’ benefit. They are known as occupational pensions. Labor organizations, federal or housing societies may also fund pensions.[br]

 

Employers establish private pension plans by making a certain deposit to a pension fund. The fund is not taxed to either the employer or the employee, till the employee retires and collects the pension benefits. The employer also gives the private pension fund to a financial services firm or a trustee, who invests the money in different stocks and bonds. Some private pension plans require the employee to make periodic contributions to the fund.

 

The private pension fund sector complies with all pension plans in accordance with the Employee Retirement Income Security Act (ERISA) and files IRS / DOL / PBGC Form 5500 with the Internal Revenue Service. This also comprises the Federal Employees Retirement System (FERS) Thrift Savings Plan, which is a supplementary retirement option available to federal employees since 1984.

 

The Individual Retirement Accounts (IRAs) are not included in the private pension funds sector. The assets of such accounts are included in financial instruments of the household and non profit organization sectors.[br]

 

Types of Private Pension plans

Private pension plans are of two types:

 

Defined benefit plan:Under a defined benefit private pension plan, an employee receives an annuity upon reaching a specified age. It depends on the

·         duration of service and

·         yearly earnings of the employee

 

Sometimes, this plan gets integrated with an individual’s social security. The employer makes all the contribution on behalf of the employee to fund his/her future benefits. Defined private pension plans are non contributory, where employees do not contribute to the pension plan and there are no individual accounts for participants. The employer bears all risk and liabilities in the plan.

Defined contribution plan:Under a defined contribution pension plan, the composition of the investment is generally decided by the participant employees. The overall portfolio is not bounded by any investment requirement. Defined contribution plans can be:

·         savings or thrift plans

·         profit sharing plans

·         ESOPs

 

The 401k plan is a well known, defined contribution private pension arrangement, where an employee makes a particular contribution to the fund from the compensation.