What you need to know about pensions

Pensions – they are a form of monetary benefit we receive after retirement and all of us are aware of that. But, let’s understand what happens inside and how they work in detail.

Pension funds typically accumulate funds for years so that there is enough money to payout to the employee on retirement. BUT…this fund isn’t kept idle in a Savings bank account. It is invested into the market such that they multiply and reap more benefit to the employee. They are also tax-efficient plans to save for retirement.

Earlier this money was invested in low risky options such as in government-backed securities such as bonds or blue-chip stocks. But nowadays the investments are made in a wide variety of asset classes such as stocks, derivatives, alternative investments, etc. But the rule of thumb is to ‘Diversify’ as much as possible. The returns which are generated from these securities serve as additional earnings to the employee.

Recently, many pension funds have moved to invest in index funds, exchange-traded funds which are passive investment instruments. Trends are even pushing investments into commodities, hedge funds, and even real-estate (REITs).

How are pension amounts calculated? Usually, the average salary of an employee from the last few years of his employment are taken and a certain percentage is calculated on them which is the pension amount. The length

Pensions are largely arranged by the employers (termed as the workplace or company pension) to which you might be asked to contribute as well. There are two main types of pensions:

1. Defined Benefit Schemes

2. Defined Contribution Schemes

You’ll get to know about these types and their benefits in detail in the following blog :)

Besides the employer-driven plans, you can choose to opt for a personal plan as well. You can start contributing to them at your own will. It’s best to start off as early as possible.

You don’t receive pensions from when you choose to receive them, but there is a ‘State Pension Age’ which you’ll have to attain. And that’s determined by your date of birth.

Pensions are not the only means to save money for your retirement, but the primary reason for them to sound so attractive is the tax relief that comes along. In the UK, this sum grows free from income tax and capital gains tax. On retirement, if you choose to withdraw a lump sum, a certain percentage is tax-free.  

In the next blog, we are certain to explain to you the two main types of pensions in-depth. Until then, Happy Investing!!