The concept of Pension Options or post retirement has been evolved.

Any person who has been working in any business house on a regular payroll will have to retire after a certain age which has been fixed or has been agreed upon. After retirement the person needs a steady income to maintain his standard of living , taking into account the rate of inflation in the market.

The employee sets aside certain amount of money every month so that after a period of time the money kept aside earns an interest from which the employee is provided a monthly sum of money.

The Pension Options are run by different institutions like banks, post office saving banks, employers or unions.

The Pension Options  are usually in the form of guaranteed life annuity thus it carries with itself the risk of longevity. The pension funds are named differently in different countries but the basic purpose and mode of operation remains the same.

The Pension Options is of two types defined benefit or defined contribution. The defined benefit plan envisages that a certain amount is paid taking into consideration the members salary and the period for which the member had been a member of the plan. A defined contribution plan will also hand out an amount which depends upon the funds contributed by the member and the performance of various instruments in which the fund has been invested. A combination of both the schemes is also popular in the US. Such type of scheme is also known as hybrid plan.

A DB or defined benefit plan is a plan which is calculated on a set of formula. Pension Options are run by institutions who are set up precisely for this purpose. The traditional plan under which the pension is paid is decided on the basis of the following formula :

No of years worked X last salary drawn X accrual rate. The amount obtained is paid as lump sum or monthly; usual monthly.

Defined benefit plan can also take into account employees pay, years of employment, age at retirement and other factors. A perfect example is the Dollars Times Service plan which fixed a certain amount of money for every year of service put in. For example a $100 a month Pension Options will provide $3000 per month to a person retiring after 30 years of service. This plan is popular among unionized workers, the FAP or Final average Pay is the most common form of benefit plan on offer in the US. The average pay of the worker in the final year of his pay is taken into account while fixing his pension amount.

Alternatively in the UK the pension amount is calculated according to the current Retail price index. If the rate of inflation is high the purchasing power of the pension is low. hence every year an arrangement is made to increase the pension by varying amounts to take care of the inflation. Such kind of pension funds is advantageous to the pensioner since it makes allowance for the price rise and inflation.