Pension

Pensions are usually provided by governments, employers or private providers, and they come in two main types.

A defined benefit pension promises a specific retirement income, often based on salary and years of service. For example, a scheme might pay one-sixtieth of final salary for each year worked, so someone with 30 years of service and a final salary of 60,000 would receive 30,000 a year. The employer bears the investment risk and must make sure there is enough money to pay.

A defined contribution pension, now more common, builds up a pot of money from contributions by the employee and often the employer. The pot is invested, and its value at retirement depends on how much was paid in and how well the investments performed. The employee bears the investment risk.

Many countries also have a state pension paid by the government, usually based on a person's record of contributions or residence.

Pensions often come with tax advantages, such as tax relief on contributions, which encourage people to save for retirement. The rules differ widely between countries.