Pension Plan

 

 

We all work to achieve a financially secure life before and after retirement. Using the right pension plan and investment strategies, one can alleviate financial hurdles in later life. Using a pension plan, one can invest in different securities and own assets. Every pension plan has an investment strategy and the returns expected depend on the capital infusion and market conditions.[br]

 

Types of pension plans

Planning a successful retirement is a complex, yet achievable goal. It is imperative to invest in the right pension plan. Pension plans can be broadly classified in two categories:

·        Defined benefit plan: A defined benefit plan is the retirement account, where the employer does all the groundwork, including collecting the amount and investing in the right place. It promises a significant payout upon retirement, based on the person’s annual salary and duration of service. There are two types of defined benefit plans, pensions and cash-balance plans. Both these plans automatically enroll the employee, upon some basic eligibility rules being met. One has to be in service for a specified period of time to be fully vested in these pension plans.

·        Defined contribution plan: A defined contribution plan, also known as a company retirement plan, such as a 401K plan, is where the employee defers some amount of his/her salary into the plan and bears an investment risk. The different defined contribution plans are:

• Profit sharing

• Stock bonus plan

• Money purchase pension plan

• Combination plan

• Thrift or savings plan

• Employee stock ownership plan (ESOP)

• 401k

• 403(b)[br]

 

How to choose a pension plan

Choosing the right pension plan requires careful judgment and reassurance of knowing that one’s money is in the right hands. Here are some tips on choosing a suitable pension plan:

·        Choose the plan that fits your budget. Also, check the contribution and the tax benefits.

·        Check if the plan lets you invest in stocks and shares through a fund supermarket.

·        It is always advisable to check the eligibility conditions and how the return would be influenced by inflation.

 

Advantages of pension plans

·        Contributions made to a pension plan are tax deductible

·        Employer contributions normally do not result in any payroll tax.

·        Investment income generated by the pension plan fund is tax exempted.

·        In the event of the pension holder’s death, his or her family receives the pension and other benefits.