Pension plan is a type of Insurance that allows one to get guaranteed income after their retirement. The plans vary greatly in terms of their structure as well as their benefit. There are two common types of retirement or pension plan. The first one is known as the money purchase plan and the other is defined benefit plan. Sometimes the two plans are combined together to form a Hybrid Retirement Plan.
Defined Benefit Plans are meant to offer a definite amount of pension to a person after its retirement whereas in money purchase plan, a fixed amount of money is contributed on a regular basis in an investment account of the policy holder. At the time of retirement, the investments as well as the interests are used to buy pension.
There are three types of formulas that are mainly used by the Insurance Companies. They are Flat benefit formulae, Final or best average earning formula and Career average-earning formula.
• Flat benefit formula – In this case the yearly pension of an individual would be a specific amount that can be drawn in every year.
• Final or best average earning formula- In this pension is adjusted as per the wages. This formula offers a specified percentage of the final earnings of a person for every year of his or her service.
• Career average-earning formula- In this Pension Plan the annual pension benefit would be the fixed percentage of one’s annual earnings.
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Tags: Insurance, Insurance Companies, Pension Plan, RETIREMENT PLAN