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Pension Policy

By: EconomyWatch Content Date: 12 October 2009

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An individual can buy a pension policy from either a state agency or private financial organization. While state pension plans are provided by the employing organization to all qualifying employees, private retirement plans can be bought by individuals at a personal level.

Pension Policy: State Pension Plans

Most companies buy state pension policies for the benefit of their employees. These are traditional social security tools, where the pension benefits depend on the salary of an employee at the time of retirement. A state pension policy also takes into consideration the number of years an individual has been a member of the scheme. These policies are specially designed to offer retirement benefits to low and average income groups. They are also called final salary schemes or defined benefit plans.

Apart from standard state pension plans, one can opt for second pension schemes as well, which offer special privileges. In the UK, these plans are called State Earnings-Related Pension Schemes (SERPS).

Private Pension Policy

An individual can buy a private pension policy through financial institutions such as banks and investment agencies. Unlike the state pension scheme, private policies work on a money purchase basis. Under these policies, money invested by the individual is accumulated over the years. When the individual retires, the accumulated income, along with the interest amount, is used to buy annuity.

Private pension policies are basically of three types:

· Personal pension: An individual can buy personal pension plans from any financial institution. It can be used to receive a lump-sum amount at the time of retirement or annuity for one’s lifetime.

· Company pension: Traditionally, employers offer pension plans that are regulated by the state authorities or a private trust. Of late, companies have begun group personal or group stockholder pension plans. Unlike state plans, these plans depend on the sum an individual chooses to contribute to the pension account.

· Phased retirement: An income drawdown or phased retirement allows an individual to draw a regular salary from the pension account instead of buying annuity. The pension company continues to invest the money till the individual buys an annuity plan.

As financial services widen in scope, both state and private agencies are devising customized retirement solutions. Thus, one can expect a whole new range of pension policies in near future.