Friday 11 July 2014
What is a Pension plan?
•A
type of retirement plan, usually tax exempt, wherein an employer makes
contributions toward a pool of funds set aside for an employee's future
benefit. The pool of funds is then invested on the employee's behalf, allowing
the employee to receive benefits upon retirement.
Types of Pension Plans
•Government-sponsored Plans: The largest government-sponsored retirement plan
is the Social Security plan .
•Personal Plans: The most popular example is the Individual
Retirement Agreement or IRA, which can come in different types according to
their tax treatment .
•Annuities: These are contracts established with an insurance
company; there are fixed and variable annuities .
Types of Pension Plan contd
1. Pension plan with /without life cover
-Pension plans with life insurance cover offers an assured life cover (i.e. sum assured) in case of death during the accumulation phase (policy term).
-Pension plans without life cover, payout the corpus built till date to the nominees in case of death of the policyholder during the policy term. There is no life cover (sum assured) in these plans.
2. Immediate Annuity and Deferred Annuity
-In case of Immediate Annuity plans, the premium amount is paid in one lump sum and the annuity/pension commences immediately after paying the premium depending on the payment frequency (Monthly, quarterly, semi annually or annually).
-In case of Deferred Annuity, a policyholder pays a regular premium for a certain number of years. This is called the accumulation phase. The money that has accumulated at the end of the accumulation phase is used to buy immediate annuities, which, in turn, generate a regular income for life. For example, if an individual buys a pension plan with tenure of 30 years then his annuity will begin at the end of the 30th year. So deferred annuities are like any other investment product that help you build a corpus by investing regularly.
3. Traditional pension plans and Unit Linked pension plans
During the accumulation phase the individual can choose to invest in a traditional pension plan or a unit-linked pension plan, based on their risk appetite. A traditional pension plan invests most of the funds in Government securities, whereas in a unit-linked retirement plan the investment is in a combination of stocks, bonds, securities, etc.
Advantages of a Pension Plan
•To
maintain the same standard of living after retirement
•Contributions
made to a pension plan are tax deductible.
•Employer
contributions do not result in any payroll taxes because they are not included
in the calculation to determine contributions to other programs, such as
employment insurance,
•Investment
income generated by the pension fund in which contributions accumulate are tax
exempt.
•The
employer contributions are vested to the plan member as soon as his or her
membership begins.
Advantages of a Pension Plan Contd
•In
the event of a member's death, his or her spouse receive a pension or other
benefit. If there is no surviving spouse, a benefit can be paid to a designated
beneficiary or to the member's heirs.
•The
benefits accumulated in a plan cannot be seized, except in a few cases, such as
a seizure to alimony or child support or for the purpose of partition of family
patrimony.
•The
pension fund does not belong to the employer; it cannot be seized if the
business goes bankrupt.
•
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