Friday, April 15, 2011

Will Your Pension Be Enough

Pension is the amount one receives during retirement as a replacement of the income that was received during one's working life. Pension funds have been in existence for a long time, as institutional investors that help the private investor to amass pension for retirement. A knowledge of the sources of the funds is hereby discussed to help the investor to assess whether enough provision has been made before retirement.
There are broadly speaking two lots of pension schemes: personal and occupational. A personal pension scheme is an individual saving effort made to put aside money towards one's pension during retirement. Occupational pension scheme is associated with the workplace and takes two forms: non-contributory, and contributory. A non-contributory pension scheme involves the employer alone paying money into a pension fund towards the retirement of the employee, whereas the contributory kind has to do with the employee also contributing part of his income into the fund.

There are two types of occupational pension schemes: 'defined benefit', also known as 'final salary' and 'defined contribution', also called 'money purchase' scheme. A defined benefit scheme specifies the level of income the employee is entitle to during retirement. The level of income is based on what the final salary of the employee is at the time of retirement, as well as on the length of service in the firm. The money purchase kind does not specify the level of income, but depends on the contribution made by the employee towards the fund, as well as on how well the fund has fared and the annuity rate at the time of retirement.

State pension is always there to provide basic pension, and these other pensions, are to act as supplements. At the time of retirement, the lump sum accumulated in the pension fund for the employee is used to take out an annuity policy in an insurance company, which then ensures that a specified annual amount is paid regularly to the retiree during the entire retirement period.

With the state pension system in a mess it looks like 'define pension' scheme is what is needed by the employee. The irony is that this type of occupational pension scheme is gradually being wipe out of the system by employers because it is considered very expensive as well as time-consuming. If at the retirement time, the pension funds do not perform well enough or the annuity rates are not high enough to provide the level of income guaranteed by the employer in a 'defined benefit' scheme, the employer is supposed to top it up. This is very different from the 'money purchase' kind, in which the employer does not have to bother himself with the performance of the pension fund or level of annuities. It is not surprising that many employers are replacing 'defined benefit' pension schemes with the 'defined contribution' kind, to the detriment of the employee.

It is thus necessary for every employee to find out how much roughly his/her income will be during retirement, relate the figure to the sort of lifestyle anticipated, and if at all the pension will not be sufficient, start stashing some extra money away in a personal pension fund.

Every worker should endeavour to face realities, and not to lose himself/herself in abstraction, when considering pension for retirement. State pension has never been enough and they will never be. It is wise to know how much pension there will be and what is needed as top-up, to ensure an easy and comfortable retirement.

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