A pay-as-you-go pension plan is a retirement scheme, where as in which a said contributor can choose how much money they would like to be deducted regularly from either their paycheck, or by perhaps a lump sum to their own retirement fund. The funds they choose to provide goes towards a retirement plan which can be then redeemed upon reaching retirement age. With this type of plan, the contributor can decide how much money they see fit to contribute to the fund. With the funds that are contributed, the contributor will be able to devise a plan on what to invest in, which in turn leaves said contributor as the person mainly responsible for how much the pension can grow. Choosing an investment that is more risky can lead to a bigger return on money however, it is also possible to choose a steady and safe investment in order to have a consistent return on money. Upon reaching the age of retirement, the contributor can choose to have their money paid to them in a lump sum, which means they will receive one large cheque with their money, or they also have the other option to receive their cash in monthly installments. A combination of these two methods is possible whereas the contributor could receive a smaller monthly fee along with a small lump sum withdrawal.

Difference to pay-as-you-go pension systems

Private pay-as-you-go pension plans are not to be confused with pay-as-you-go pension systems. The latter term refers to state pension systems that are funded by contributions from current workers (rather than by individual past contributions from current beneficiaries). The underlying pay-as-you-go (PAYG or PAYGO) principle is applied in social insurance systems across the world.

References

{{Reflist Retirement plans in the United States