Pensions: The Basics

How it works: A pension, an arrangement to provide people with an income when they are no longer earning a regular income from employment, is a tax-deferred savings vehicle. Pension plans became popular in the United States during World War II, when wage freezes made pay increases impossible. The defined-benefit plan became the most common type of retirement plan in the United States through the 1980s. In most employer-sponsored pensions, both employer and employee contribute money to a fund during the employee's tenure in order for him or her to receive defined benefits upon retirement. Funding can also be provided by labor unions or government agencies.

Who's eligible: Each employer sponsoring a pension has its own requirements for eligibility and for withdrawing funds. In most cases, funds are not eligible for withdrawal until the worker reaches age 65, but there are exceptions. For instance, the U.S. Veterans Pension Plan is accessible to all veterans at age 65, but younger veterans can access the funds for home health care, assisted living facilities or nursing homes if their need for aid is service-related.

Why? A pension offers free money set aside by your employer. If it's available to you, take it. 

Why not? While nobody should refuse a pension, don't depend on it solely to fund your retirement. Private company pensions are few and far between these days, and public pensions are underfunded.

The fine print: If you're counting on a pension to fund your retirement, stay informed. Private pension plans, such as those sponsored by major automakers, are disappearing quickly or facing cuts, and publicly funded pensions are also under fire. According to a Pew report released in April, the gap between states' obligations for public employees' retirement benefits and the money set aside to pay for them grew to at least $1.26 trillion in fiscal year 2009 -- that's a 26 percent increase in one year.

Tools:  Try this pension benefits calculator

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