A pension plan is a type of retirement plan. It requires you to make contributions on monthly basis of a set percentage while you are working at an organization and your employer matches or contributes a set of certain percentage to it. The aim of pension plans is to help people plan for their retirement. It is best advisable to start investing in it as early as possible, right from the day you start earning.
To invest from the start allows you to save and optimize the annual savings you need to make without having the need to stretch to save. The later you start saving for it, the greater amount you would need to save annually. But before you take a leap and begin investing in a retirement plan, here’s a go-to guide of some facts you should be aware about.
What is a pension?
A pension is a financial product that you put money into, in order to build up a fund that’s ready right when you retire. The money that you save as a retirement fund gets a boost from tax relief, so ultimately you are saving out of untaxed earnings. In retirement, that pension fund is accessible to buy yourself an income and if you are lucky, you could avail the final benefit scheme, also known as final salary where your employer contributes and picks up the tab.
Types of work pension schemes
There are typically two types of pension that you will often get to hear, one is defined contribution and other is defined benefit schemes. In the case of defined benefit schemes, they pay you a set annual income in retirement. This is often the final salary scheme, since they can pay you basis your earnings towards the end of your employment with an organization. The most important thing to remember about defined benefit scheme is that your employer is bound to contribute a certain amount every year for your retirement and should take responsibility for that.
Defined contribution schemes typically do not assure any set payouts in retirement. Instead, you are expected to invest in order to build up a savings pot that can eventually be utilized as an income provider. With a contribution pension scheme, the employee can decide the amount to be paid in percentage of their salary and accordingly the employer matches some or all of the contribution.
Once you understand all of these aspects, you’ll be able to make retirement planning decisions swiftly. Overall, a pension plan is a great retirement option depending on how well you understand all the factors, long enough to repeat its benefits.
Image source: ThinkStock/Getty