Fact Checked

What Is a Pension Contribution?

Cindy Quarters
Cindy Quarters

A pension is a fund that is set aside for a person to live on once he or she retires from the workforce. The amount of the pension depends on several different factors. One of the most important of these factors is how much money the person has put into the fund while working. Money that is deposited in a pension account is referred to as a pension contribution.

It is very common for a person to contribute a set amount from every paycheck toward retirement. This may be a specific dollar amount or it may be a percentage of the person’s total pay. Either way, this pension contribution goes into a pension fund, where it is generally managed by a third party until the contributor reaches retirement age.

Man with hands on his hips
Man with hands on his hips

Some employers match an employee’s pension contribution with a contribution to the employee’s pension fund from the company. These amounts generally have a number of rules attached, such as how many years the employee must work for the company before being eligible to receive the company’s portion of the pension contribution and the maximum amount the company will match. For long-term employees making regular deposits in a pension fund, having the fund doubled by contributions from the employer is an excellent way to have a pension grow quickly.

The money in a pension fund is managed by a third party chosen either by the employee or the employer, depending on the specific type of fund and company policy. This third party takes the pension contributions from both the employee and the employer and invests them in a variety of different ways. Money is often invested into the stock market, usually in a portfolio of stocks that have a history of gains over time. It is not uncommon for pension fund managers hired by public companies to invest in that company’s stock as well.

One big advantage of making a regular pension contribution is that the money is taken from pay before taxes are figured, so employees are not taxed on money set aside for retirement. This encourages people to contribute a substantial amount on a regular basis, not only helping them to prepare for retirement but also reducing current income taxes payable. If the money is taken out of the pension fund prior to retirement, there can be substantial financial penalties, but for those able to leave the money in place, a pension fund can provide a great deal of security at retirement time.

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