How to Invest Your Pension

In terms of retirement, a pension is very much similar to an IRA, 401K and other savings programs that allow users to invest in a wide array of choices. Pensions are often very flexible, and many investments are catered directly to the pension investing crowd. With this kind of specialized service, pension investors find it easier to make investments, and as a whole, the quality of pension investments has grown considerably.

Growing Money Tax Free

Pension programs accumulate earnings tax-free until withdrawal. This is by far one of the largest benefits of tax-free contributions and distributions, meaning a huge savings on the tax bill for the overall return. Though traditional pension programs are generally invested in low return securities and mutual funds, the tax benefits make a pension a consideration for any investor.

Employers Like to Reward Their Employees

Employers love to reward their employees, especially when it creates a tax break. Pension programs create an immediate tax deduction for employers, even if the vested individual does not withdraw for another 30 years. Each pension must be equal for all employees and lay out basic guidelines that must apply to every worker. Pension programs are highly regulated and a great bet for investors who demand a sense of security from their retirement program; each pension must be the same for every employee in the office.

401k Pensions

While 401K programs are considered in the column of pension programs, most talk of pensions comes from two other types of programs that have large differences with a 401k: defined benefit plans and defined contribution plans.

Defined Benefit Plans

Defined benefit plans often come with very little freedom to choose how your money will be invested. Since the pension is guaranteeing a specific payment amount after retirement, you won't be able to decide how to invest your money. Defined benefit plans have to be able to make the payments that have been guaranteed, thus they need to utilize their own investments to reach a definite payout.

Defined Contribution Plan

The defined contribution plan outlines how much each investor must put into his or her pension each month or each period. This category includes the 401k, 403b and other investment vehicles, including employee stock plans and some profit sharing vehicles. A defined contribution plan puts the investment risk in the hands of the investor; unlike the defined benefit plan, the defined contribution plan offers zero promises to the amount of money that will be paid out after the employee retires.

Pension Strategy

Defined benefit plans guarantee a certain amount to be paid after retirement, while the defined contribution plan does not. Defined benefit plans share no risk with the employee, as it is the job of the pension manager to ensure that all payments can be made. Defined benefit plans generally have a smaller benefit than a defined contribution plan due to the fact that payments are guaranteed and the investment managers must have some degree of risk built in, thus the returns from defined benefit plans will be likely limited.