What it is The Advantages Who is eligible What it isn't Benefits Leaving your job or retiring What It Is A pension plan is a retirement plan, offered by some employers, that pays a set amount each year during retirement. Also called a defined-benefit plan, company pensions guarantee a specific amount of benefits to employees, calculated using a formula that typically includes your final salary, years of service, and a fixed percentage rate. NOTE: The term "pension plan," when broadly defined, includes both defined benefit plans such as company pension plans as well as defined contribution plans such as 401(k)s. Increasingly, however, the term is used when discussing pension plans of the defined benefit variety, and we have followed the convention here. The Advantages It's Insured Most pension plans are covered by the Pension Benefit Guaranty Corporation, or PBGC, a federal agency that protects employer-sponsored defined-benefit plans. Payments from these plans are insured by the PBGC up to a monthly maximum of $3,051.14 for a worker who retires at age 65. This maximum monthly amount is reduced if you begin receiving payments before age 65 or if your pension includes benefits for a survivor or other beneficiary. It Rewards Loyalty Because the formula used to calculate company pension plan benefits usually involves years of service, the "loyal company man/woman" is rewarded for longevity. Who Is Eligible Depending on your company's pension plan rules, you may be eligible for a pension after a period of service (either 5 or 7 years) known as the vesting period. However, not all workers or all jobs may be included. What It Isn't A company Pension Plan is different from a 401(k) in a few ways: Benefits. The pension plan benefits are known in advance. They are determined by final salary, years of service, and a fixed percentage rate. In a 401(k) plan, the benefits are dependent on individual contribution levels and portfolio performance. Transferability. A company pension plan stays put when you leave your job. A 401(k) account can be rolled over into another 401(k) plan or an IRA. Investment Allocation Decisions. A plan administrator makes the decisions for the future "pensioners," while in a 401(k), each participant manages his or her individual portfolio. Funding. Funding is provided by employers only in a pension plan, and by employees and (most) employers in a 401(k) plan. Benefits Most company pension plan benefits are paid out in the form of an annuity, a fixed monthly payment for the rest of your life. The formula used to calculate company pension plan benefits typically includes your final salary, years of service, and a fixed percentage rate (often 2%). Moving from job to job and plan to plan (or no plan!) can be costly. All else being equal, the "loyal company man/woman" is rewarded and the job-hopper suffers when this formula is used. Leaving Your Job or Retiring Early When you leave your job, your pension benefits stay in the company-sponsored plan, where they can be claimed at age 65. Some pension plans allow you to begin collecting pension benefits before the traditional retirement age of 65. However, like Social Security, your benefit may be reduced because you will be receiving benefits over a longer period of time. For more information about your pension, ask your employer or plan administrator for a pension plan document or pension plan summary. The tax information provided is for informational purposes only and is not intended, and should not be construed, as tax advice or a recommendation. Intuit does not provide legal, tax, or investment advice and you should consult with a professional tax advisor about your individual circumstances.