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Frozen Pension Plan

Frozen Pension Plan

A pension scheme or plan is a kind of defined benefit plan for an employee’s retirement savings. The company makes the contribution, and the employee receives monthly payments for the company at the time of retirement. Pensions funds are not cheap for companies to maintain. In some case, if the company’s finances go bad, it can freeze its plan. If the pension plan is frozen, it has a huge impact on the mount of income the employee will receive once he/she retires.

Soft Freeze

If the pension plan is on soft freeze, your benefits are significantly reduced. This means that the pension benefits that you will get will still continue to grow. However, this growth will be based on the increase in your salary and not getting credit for your additional years of employment. The company also have the option to put a cap or limit on the amount used in calculating the monthly benefit you will get. Take for an example, the benefits you are entitled can be based on the average of your salary over a certain number of years rather than the amount of your salary once you reach retirement. Depending on the financial situation of the company, the pension benefits can be affected just specific group like new hires or all employees.

Hard Freeze

A hard freeze is something many employees would not want their employers will do, but it is not their decision to make, it’s the company. A hard freeze is when the company actually stop providing payments on a pension account altogether. Although you will not lose all the money you have paid for the pension, it can significantly reduce the number of benefits you will get during retirement. Monthly pension payout depends on your current salary, the number of years of your service, and your age. When the pension plant is frozen, the payout will be calculated based on these three factors and the time the plan was frozen. It means that even if you’re promoted and earn a high salary, it will not increase your benefits since there is no change in your pension plan payments.

Alternatives

In an employer decides to freeze a pension plan, alternatives like 457, 403b, or 401k may be offered. These pension plans are considered as defined contribution plans. Therefore, you are now responsible for making your own pension contributions. Although employers can offer a matching contribution, they are not required to. These types of pensions plans do not guarantee a set amount of benefit once you reach retirement. The amount of your benefit will depend on the number of your contributions and the number of years you made contributions before you retire. The performance of your investment also plays a significant role in the benefits you will get. The brighter side is that you have the option to transfer the pension plant to another account should you decided to quit your job.

Termination of Pension

In rare cases, a company may terminate the pension plan rather than freezing it. Under the law, the company will reimburse you with all the money that you earned if your pension is terminated. This means that you will receive a lump sum of your contributions that you can roll over to a pension alternative.

 

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