What is the difference between gratuity and pension?
Life has several stages that we all go through- for instance, there are years of labour and when one must retire from public service. The years of retirement should be planned to ensure one enjoys the benefits of their non-working years.
Planning for a better retirement involves planning to have sufficient finances to live through your retirement years. This is why it’s important to receive a pension after retirement.
But what will be discussed in this article is the difference between gratuity vs pension.
According to the Oxford English Dictionary, a pension is a gratuity paid regularly as a benefit due to a person in consideration of past service. In contrast, gratuity is a reward, service or payment provided freely without any obligation.
Gratuity and pension are retirement benefits that serve to provide income to retired employees. Although they provide financial security to retired individuals, there is a difference between gratuity and pension.
What Is Gratuity?
A simple definition of the term “gratuity” refers to the reward, service or payment provided to employees without an obligation. It’s an after-retirement security benefit provided by the employers based on service provided by the employee to their establishment.
A gratuity is a form of recognition to appreciate the service of employees and their contribution toward the growth of an established. An employee’s years of service to a company is compensated by his or her employer.
Employees are rewarded for their years of service when they leave or retire from an establishment. The employee leaving or retiring from the company will receive a huge amount of money as a reward based on the number of years they worked for the company.
An employee who has been working with a company for years is eligible to receive a gratuity when they are sacked from the company. On average, an employee must have served the company for five years or more to receive a gratuity.
An employee is entitled to receive his or her gratuity. However, if an employee were to be deceased, their reward for serving the company will be given to the nominee, once the nomination is performed. It can also be given to the deceased employee’s heirs in the absence of any nomination.
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What Is Pension?
The simple definition of pension refers to it as a gratuity paid regularly as benefits due to a person in consideration of past services. It’s the frequent payment made to retired employees by a pension fund or their employer.
A pension is a form of benefit plan for employees to receive a sustainable amount of money regularly after retirement.
In general, pension is calculated based on factors like years of service and employee’s salary history. A pension plan is sustainable and it works when the employer contributes to a pension fund, while their employees are still active in service.
The funds contributed to a pension fund during an employee’s working years is invested to generate profitable returns. The invested fund will later be used to pay out the pension when the employee is retired from service.
An employee’s pension payment will either continue for the rest of their retirement life or for a specific period.
Gratuity vs Pension: The Two Types of Pensions
The two types of pension are defined benefit plans and defined contribution plans.
- Defined Benefit Plans: This type of pension plan guarantees a specific level of salary for the retiree. The employee’s salary and years of service determine the amount of the income.
- Defined Contribution Plans: This type of pension plan does not guarantee any level of income. The amount of the income depends on how much money the employer or employee decides to contribute to the pension plan and the performance of the investment in the plan.
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Gratuity vs Pension: Key Differences between Gratuity and Pension
Gratuity and pension are forms of financial benefits offered to employees to acknowledge years of service after retirement.
Unlike a pension, a gratuity is a one-time payment that employees receive from their employers as a form of recognition and appreciation. Pension and gratuity serve different purposes just as they are structured.
Gratuity serves as a form of appreciation to pay off an employee who have dedicated years working with the company. Employees are rewarded for their years of service when they leave or retire from an establishment.
An employee is entitled to receive his or her gratuity. However, if an employee were to be deceased, their reward for serving the company will be given to the nominee, once the nomination is performed. It can also be given to the deceased employee’s heirs in the absence of any nomination.
In contrast, a pension is a retirement plan that guarantees the regular payment of a sustainable amount of money to a retiree. Pension plans are designed to offer financial security after retirement.
In general, pension is calculated based on factors like years of service and employee’s salary history. A pension plan is sustainable and it works when the employer contributes to a pension fund, while their employees are still active in service.
Gratuity vs Pension: Nature of Payment
Gratuity is a one-time payment that employees receive from their employers as a form of recognition and appreciation after their resignation or retirement.
Pension is a regular payment made in instalments to a retiree after years of service to a company or organization. The regular payment is either valid throughout the life of the retired employee or for a specific period based on the pension plan’s terms.
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Gratuity vs Pension: Duration
Unlike a pension, a gratuity is only paid once. It’s a one-time payment paid to a loyal employee who is retiring from service or resigning.
A pension is a form of benefit plan for employees to receive a sustainable amount of money regularly after retirement. A pension plan can either be valid throughout the retiree’s life or for a specific period depending on the pension plan.
Gratuity vs Pension: Nature of Benefit
Gratuity is a one-time payment that employees receive from their employers as a form of recognition and appreciation after their resignation or retirement. It’s a gratification or reward given to loyal employees for their years of service.
Pension is a regular payment made in instalments to a retiree after years of service to a company or organization. It provides financial security to retired individuals, serving as a source of income in their retirement years.
Gratuity vs Pension: Funding Approach
A gratuity is an organized contribution plan made by the employer to contribute a certain amount of money into the gratuity fund. The payment of the gratuity depends on the fund’s performance.
A pension is a retirement benefit plan that offers financial security to a retiree. The employer takes the responsibility to fund the pension plan. The employer also assumes the investment risk to ensure payments are made regularly.
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Gratuity vs Pension: Comparison Chart
| Gratuity | Pension | |
| Purpose | To thank loyal employees for their years of service | Ensures regular income during the years of retirement |
| Type of Payment | Lump-sum payment | Regular payment |
| Paying time | Mainly at retirement or resignation | Begins once the employee retires and continues regularly |
| Eligibility | A minimum of five years or more | Depends on service length and age |
| Calculation basis | Based on years of service and final | Based on salary history and years of service |
| Contribution | Employer-fund, no employee’s contribution | Often requires contribution from both the employer and the employee |
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References
- Medium: Difference Between Gratuity and Pension
- Business Compiler.ng: Difference between Pension and Gratuity
