Advantages & Disadvantages of Pensions

by Luke Arthur ; Updated July 27, 2017

The pension plan is a retirement planning option that some employers offer as a benefit to employees. This plan aims to simplified the process of saving for your retirement benefits. While it is simpler for employees, it can also limit the amount of money you have and the level of control you have over your money.

Employer Contributions

One of the advantages of having a pension plan at your employer is that you do not have to take money out of your income to contribute to the plan. Pension plans are fully funded by the employer. By comparison, with other retirement plans, such as the 401k, you have to choose to take money out of your paycheck to save for retirement. This lowers your take home pay and requires you to make a conscious decision to save for retirement.

Simplicity

Another advantage of a pension plan is that it is simple. With a pension plan, you know that after working a certain number of years, you will have a specific amount of retirement benefit. The benefit is guaranteed by the company and usually by an insurance policy. This means that you do not have to worry about the ups-and-downs of the market and you can simply focus on your job. With a pension, you leave everything up to the company and the money managers.

Lack of Control

One of the potential disadvantages of using a defined benefit pension plan is that you have to deal with a lack of control. With this type of plan, you do not need to choose the individual investments for our money. If you are the type of person who is proactive when it comes to investing, this type of retirement plan will not be the best option for you to use.

Smaller Potential

Another possible problem that comes with pension plans is that the potential is smaller than that of a defined contribution retirement plan. With a defined benefit plan, you know exactly how much you can have when you retire. By comparison, if you were to use a 401k or another qualified retirement plan, you could potentially have more money available to you when you retire. If you contribute the maximum amount to your plan and choose the right investments, you could have much more money when you reach retirement.

About the Author

Luke Arthur has been writing professionally since 2004 on a number of different subjects. In addition to writing informative articles, he published a book, "Modern Day Parables," in 2008. Arthur holds a Bachelor of Science in business from Missouri State University.