Difference between Pension and Retirement

DifferencesFinance ManagementInsurance & Investment

The terms, Pension, and Retirement, are related to employment. Both are the result of the aftermath when an employee, either working in a private or public sector, quit their job on various grounds, provided that they give their service for an extended period according to the clauses in the agreement between the employee and his employer.

Everybody needs to understand “what is Pension and Retirement?’ as these are inevitable things that have to be faced by every employee in their future. Let’s dive deeper to get a broad spectrum on this topic.

What is Pension?

The word pension is derived from the Latin word pension, which means payment. Pension is a sum of money paid to the retired employee by his employer. It can be paid either at once enormously or as monthly or annual pay-outs.

Pension is the amount of deducted money collected from an employee's regular wages, which is paid after he retires. Pension is deducted from the salary in percentage.

Let me simplify by giving an example; in Indian government jobs, the maximum pension limit is 50% of the emoluments or average emoluments, whichever is beneficial, and the minimum pension is Rs. 9000 per month.

A person can be entitled to receive their pension after passing specific criteria. Let’s understand it by an example − In the Indian Army, a soldier will be entitled to receive their pension only after serving for 20 years in the industry. If they opt for early premature retirement, they will not be allowed to receive their paid pension.

Merits and Demerits of Pension

Following are the merits of pension −

  • It promises financial and social security to the employees to post their retirement.

  • Pension can be paid on monthly or annual payouts or get a considerable sum of money as per their convenience.

  • Pension makes the employee’s service accountable to the employer and it is also a way to honor and respect their service.

  • It acts as savings for the person.

Following are the demerits of pension −

  • Not every job has pension plans.

  • Tax relief is not promised.

  • It is not beneficial for short-term investments.

  • It is not beneficial for people who invest late in life.

What is Retirement?

The word ‘Retirement’ is derived from the French word ‘retirer’ which means ‘to withdraw
something’, where ‘re’ means ‘back’ and ‘tirer’ means ‘to draw’.

Retirement is a stage of a person’s life when he decides to permanently withdraw from this job, or simply retire. It is one of the most important decisions an employee would take in his life in terms of his working life. Taking retirement sounds pleasing to many but it may not turn out to be as sweet and pleasing as one would think. Retirement decides the financial and social security of a person. So one needs to think well and take this huge decision. There are several conditions to be ticked to call retirement. One has to serve their job for a period of time. Let me elaborate on it by explaining an example, back in time a soldier in the Indian Army can retire after serving for 20 years of time, but now they also take premature retirement.

The reasons for everybody to take retirement or permanently end their working life is different. For one it may be because he /she wants the paramount sum of pension money, for another he/she does not want to work further, for another person he/she wants to travel the world and being in a job is not giving him ample time to travel, many more reasons that would never end.

Merits and Demerits of Retirement

Following are the merits of retirement −

  • Most of the time, taking Retirement would give a way to get a paramount sum of pension

  • Retiring would give a new opportunity to build a career in an intriguing way as per one’s convenience, for example, entrepreneurship, traveling blog, and many more.

  • Job is a major source of stress in life. Taking permanent retirement from a monotonous job puts a full stop to the stress that comes from a job, and gives us a lot of time to improve our mental and physical health. For example, the mental health and physical health of a software engineer can be caused a lot of harm due to sitting on a chair for 12 hours a day and in Infront of the monitor screen which emits blue rays which harm one’s eyes and nervous system.

  • Taking retirement to allocate us ample time to spend with our family.

Following are the demerits of retirement −

  • One will be in old age when one retires. Hence, establishing oneself in another career can be mostly impossible.

  • There will be no main source of income, and one can live only on savings and other sources of income.

  • There will be a lack of Social and Financial security.

  • Life can be boring and there will be a lack of purpose in life.

Difference between Pension and Retirement

The following table will help you to get a clarity between Pension and Retirement −

Sum of money paid to the employee when he retires for their service.
Quitting a monotonous job after serving for a particular period of time.
The pension was initiated to provide financial and social security to employees if they choose not to work further.
To provide freedom from a steady job.
Determining factor
Salary and length of the service in the company determine the pension.
Exit from the job after serving for a fixed number of years.
Decision making
The company takes the decision on the pension.
The employee makes the decision to take retirement.
Tax implication
Tax may or may not be implied depending on the policies and laws of the country.
No Tax implications.


Both Pension and Retirement are related to each other. Every employee makes pension plans and retirements. Employees in today’s generation think ahead of time into the spectrum of the future and negotiate pensions and salaries before signing contracts/jobs.

The notion behind the introduction of the pension is to make their employee financially stronger to live and manage life after retirement, while retirement is to give an honorary exit from working life. Many people choose to invest their pensions in stocks, buy properties, and utilize their pensions. Many corporate companies offer health insurance as a part of pension and also retirement.

Growth in industries has widened the gate of opportunities. Hence, the introduction of traditional retirement, temporary retirement, early retirement, and semi-retirement, many more types of retirement in different countries. Hope this article has given you a clear insight into pension and retirement.

Updated on 13-Jul-2022 08:05:12