What is the difference between pension and gratuity?

Pension and gratuity are both forms of retirement benefits provided by employers, but they differ in their structure and how they are calculated:

Pension:

Pension is a regular payment made by an employer to an employee after retirement.

It is usually based on factors such as the employee’s salary, years of service, and a predetermined formula set by the employer or a pension scheme.

Pension payments are typically made monthly and continue for the rest of the retiree’s life, providing a steady income during retirement.

Pensions may be funded by the employer, the employee, or both, and they may be administered through company-sponsored pension plans, government-run schemes, or private pension funds.

Gratuity:

Gratuity, also known as a retirement or severance gratuity, is a one-time lump sum payment made by an employer to an employee upon completion of a certain period of service, typically five years or more.

Unlike pensions, gratuity is usually not based on salary or a predetermined formula but is instead calculated based on the employee’s length of service with the company.

The amount of gratuity is often determined by multiplying the employee’s basic salary or wages by a certain number of years of service as specified by local labor laws or company policies.

Gratuity payments are typically made at the time of retirement or resignation and provide a financial reward for the employee’s loyalty and service to the company.

In summary, while both pension and gratuity are forms of retirement benefits, pensions provide a regular income stream during retirement based on factors like salary and years of service, whereas gratuity is a one-time lump sum payment based mainly on the employee’s length of service with the company.