Pension and gratuity are two common retirement benefits provided by employers to their employees as a form of financial security after they leave their job. Both serve as a means of providing income to retired individuals, but they differ in their structure and payment mechanisms.
What is a Pension?
A pension is a regular payment made to a retired employee by their employer or a pension fund, which is usually set up by the employer. It is a form of defined benefit plan where the employee receives a predetermined amount of money regularly after retirement. The pension amount is typically calculated based on factors such as the employee's years of service and their salary history.
In a pension plan, the employer contributes to a pension fund during the employee's working years. This fund is invested to generate returns, which are then used to pay out the pension during the employee's retirement. The pension payments continue for the rest of the retiree's life or for a specific period, depending on the terms of the pension plan.
What is Gratuity
Gratuity, on the other hand, is a one-time lump-sum payment given to an employee by the employer as a token of appreciation for the employee's service upon their retirement or resignation. It is a form of defined contribution plan, where the employer sets aside a portion of the employee's salary into a gratuity fund.
The gratuity amount is determined by a formula that takes into account the employee's tenure of service and their last drawn salary. The longer an employee has worked for the company, and the higher their salary at the time of leaving, the larger the gratuity amount will be.
Pension vs. Gratuity
Nature of Payment
Pension: It is a regular payment made in installments (monthly, quarterly, etc.) to the retired employee for the remainder of their life or for a specific period as per the pension plan's terms.
Gratuity: It is a one-time lump-sum payment given to the employee at the time of retirement or resignation.
Payment Structure
Pension: The payment continues for the duration specified in the pension plan or until the retiree's demise.
Gratuity: The payment is made in a single lump sum at the time of retirement or resignation.
Funding Approach
Pension: It is a defined benefit plan, where the employer takes the responsibility of funding the pension plan and assumes the investment risk to ensure regular payments.
Gratuity: It is a defined contribution plan, where the employer contributes a specific amount into the gratuity fund, and the eventual payment depends on the fund's performance.
Duration
Pension: The pension continues until the specified period (if any) or the employee's death.
Gratuity: The gratuity is a one-time payment and does not continue after it is disbursed.
In conclusion, pension is a regular payment made over time, while gratuity is a one-time lump-sum payment. Pensions are typically based on salary and years of service and are funded and managed by the employer, whereas gratuity depends on the employee's salary and tenure and is usually funded by the employer in the form of a gratuity fund. Both pension and gratuity serve as essential retirement benefits to provide financial security to employees after they stop working.
Read also: Difference between Pension and Annuity