Not every Pension is a Pension: Don’t Be Fooled by the Label

What Are Pensions?

A pension, for tax purposes, is generally defined as a regular payment received during retirement from a fund into which anindividual — or their employer — contributed during their working life.

Pensions serve as a form of retirement income,offering financial support after someone leaves active employment. But how theyare structured — and taxed — varies significantly.

Types of Pensions

There are several categories of pensions, each with its ownfunding model and tax implications:

🔹 Private Pensions

These are retirement plans set up by employers, groups,or individuals and are typically managed by private financial institutions.Participation is usually voluntary, unlike public pensions.

Types of Private Pensions include:

• Defined  Benefit Plans
  
      Guarantee a specific monthly benefit at retirement, often calculated based on the retiree’s salary and years of service.
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• Defined  Contribution Plans
  
      Involve contributions from employees and/or employers to individual accounts. The final benefit depends on contributions and investment returns.

‍🔹Public Pensions

These are government-sponsored pensions, such as state social security schemes, which provide benefits based on an individual’s earnings history and contributions over time.

Ways of Cashing Out a Pension Scheme

Upon retirement, beneficiaries can typically choose between lump sum payments and periodic payments (also known as annuities). Eachoption carries different tax consequences.

Lump Sum Payments

• A one-time distribution of the entire pension value.
• Provides immediate access to funds but may trigger higher taxation if the amount is     large.

Periodic Payments (Annuities)

• Regular monthly or annual payments over a fixed term or for life.
• Often provide a more stable post-retirement income and may benefit from  preferential tax rates depending on the jurisdiction