Pension Contributions

If you’re working, chances are that you already make regular contributions to your retirement income through Social Security taxes. However, these will only cover a portion of what you’ll need to live out your retirement comfortably. Pension contributions are another important piece of the puzzle, and in this article, we’ll look at what they are and the different types of pension plans you can receive.

To understand what pension contributions are, we need to first define what a pension is. A pension is a fund or account that is paid into when a person is working and which then pays out to that person when they retire. While the term pension is often used to mean any type of retirement plan, in the United States, a pension is also known as a defined-benefit retirement plan, which pays the beneficiary a set amount in benefits for the rest of their life.

Pension contributions are amounts of money paid into pension saving accounts or pension funds. These contributions usually come from employers but can also come from employees, unions, or the state. They may or may not be taxed before being paid in, depending on the circumstances.

Savings plans for retirement come in two main categories, defined-contribution and defined-benefit plans. 

Defined-Contribution Plans

The former group includes the well-known and widely used 401(k) plan, a type of retirement savings plan. Defined-contribution plans refer to the fact that contributions are fixed by the plan contributors, usually both the employee and their employer, in the case of 401(k)s. However, these plans don’t pay a guaranteed, defined benefit to the beneficiary upon their retirement. Instead, the amount the beneficiary receives depends on investment income and how these investments perform. With 401(k) plans, for example, investments are selected and managed by employees, and this can affect how much they receive in distributions upon retirement.

Defined-Benefit Plans

In contrast, pensions are defined-benefit plans that pay out pre-set amounts to beneficiaries when they retire. Employers normally make the majority of contributions to these plans and if they use investments to increase these contributions, the employer typically manages them rather than the employee. If the amount paid into a defined-contribution plan isn’t enough to cover the promised contribution, often due to poor investment performance, the employer is liable for making up the difference. This ensures that the beneficiary of the plan receives the defined benefit that the plan offers.

In general, a defined-benefit plan or pension pays benefits to retirees depending on their roles and income while they worked and their years of service. The longer someone works and the higher their salary, the greater their pension benefits will be.

While most people know how 401(k) plans work, defined-benefit pensions are usually so familiar. Here’s how they typically work:

Pension Contribution Limits

 
In general, employees make smaller contributions to their pensions while their employers contribute most of the money. They also control how that money is stored and invested. The employer typically tries to invest the money in stocks, mutual funds, and other vehicles to grow it for the benefit of all employees in the same pension fund. Contributions are based on how much it will take to pay out the defined benefit the plan promises. In 2025, the annual benefit paid cannot be more than 100% of the participant’s average for their highest three consecutive working years or $280,000, whichever is lower.

Vesting

 
Vesting refers to the time period that an employee must work for an employer before becoming entitled to their pension or vested. This period is generally defined by the employer and protects their interests to ensure the employee makes a reasonable work contribution to their organization. Vesting can be immediate or follow a schedule of up to seven years.

Benefits

 
Employees can normally choose to receive a lump sum when they retire or a monthly payment, which may last for the rest of their lives. Because it’s harder for the employer to pay a lump sum, this may be calculated as a lower amount than a long-term payout (annuity).

Taxation

 
Generally, pension contributions are made with pre-tax dollars. The employer’s (and possibly the employee’s) money is put into the pension account or fund and is therefore not counted as income by the Internal Revenue Service (IRS). However, when the beneficiary retires and starts receiving pension distributions, these are taxed as income. The beneficiary will normally have a lower income after retirement and be in a lower tax bracket which makes pension payments tax-advantaged.

There are many different kinds of pension plans used around the world. They’re usually defined by who pays the pension contributions, whether this is an employer or another payer. These pension types include:

Employment Pensions

Employment pensions have been used for over a hundred years to support dedicated workers after their retirement. In general, the employer defines a set benefit that will be paid out based on the employee’s earnings and years of service. The pension contributions come, for the most part, from the employer, but smaller employee contributions may be required and/or optional. When they retire, employees can usually choose to receive a monthly annuity or take a single, lump-sum payment.

Union Pensions

Union pensions are organized for union members and pension contributions can come from the union, the employer, or both. Lesser contributions may also come from union members. Generally, a unionized worker receives a fixed benefit upon retirement based on their years of service and their earnings during this time.

Social Security Pensions

The old-age benefits paid by Social Security in the US represent a type of government-administered pension. However, unlike many pension types, benefits come not from personal pension accounts but from a shared pension fund. Nearly all workers in the US pay into this fund through Social Security taxes, as do their employers. In 2025, contributions are deducted from workers’ wages at the rate of 6.2% and are matched by their employers for a total of 12.4% of employees’ earned income. These taxes are used to fund benefits for retirees now, and future contributors will pay into the fund to support those working and paying now. The more that an employee contributes to Social Security, the greater their benefits will be when they retire.

State Pensions

Many countries have a state pension program that pays defined benefits to all retirees once they are of age. The contributions for these pensions come directly from government revenues and are not paid by the recipients as in Social Security pensions. State pensions are normally universal for citizens and pay regular but low amounts for the rest of the retired beneficiary’s life.

For example, Thailand operates a state pension program called the Old Age Allowance, which pays all eligible Thai citizens a small, fixed, monthly sum according to their age. 60-69-year-olds receive 600 THB/month (around 18 USD), and people over 90 receive 1000 THB/month (around 30 USD). 

Military Pensions

Most militaries, including the United States Military, offer pensions for soldiers when they retire. Benefits are also often paid to spouses after the soldiers’ deaths. The US Army offers a pension, for example, that soldiers can receive after 20 years of service, which typically represents 40% of their highest basic pay while they served with the army. Beneficiaries can choose to be paid out in a lump sum or in monthly payments.

Compared with other retirement savings plans or simply keeping your own money in the bank, defined benefit pensions have several advantages for employees, including:

• Financial security and easy planning with a known, regular benefit to be paid out in the future.
• Benefits may be paid regularly for life.
• Risk is placed on the employer rather than the employee to manage pension contribution investments.
• Employees make minimal contributions.

Pensions can also be disadvantageous when compared with 401(k) plans and other types of retirement plans. Downsides include:

• Employer controls investments.
• Not easily portable if you leave your job.
• If the employer falls into financial difficulty or even bankruptcy, you may not receive your full benefits.
• Benefits may not be transferrable to another beneficiary if you die.

Pensions are defined-benefit retirement savings plans that employers use to reward their employees and provide them with retirement income. They offer security compared to other types of plans because they provide set regular payments, though they reduce the opportunity for employees to invest and grow their own money. In general, people choose pensions because they’re stable and help employees plan easily for their future.

To find out how to best manage pension contributions in the US or internationally, check out our guide to the best EOR providers.