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Retirement Savings 101: What are Pensions? - Likeitgirl

Retirement Savings 101: What are Pensions?

Planning for retirement? It’s important to understand what pensions are, how they work, and how to manage multiple pension plans.

In short, a pension plan allows your employer to take money from your paycheck each month and put it in an account that pays interest until retirement: this is called deferred income or delayed compensation. Now, it’s time to get into the details.

How Pension Plans Work

A pension is an arrangement where the employer agrees to pay the employee a fixed sum of money after retirement. This payment, called a pension benefit or annuity, can be paid as either periodic payments or as one lump-sum payment at the time of retirement. The amount of money that you will receive from your employer’s pension plan can depend on a few things, such as how much you earned while working for them and how old you are when you retire.

Two Main Types of Pension Plans

Various types of pension plans have existed throughout history. According to the Pension Research Council, pensions date as far back as ancient Rome. Over the years, many different types of pension plans have come and gone. Today there are two main types: defined benefit and defined contribution plans.

Defined benefit pension plans

Defined benefit pension plans specify the exact amount you will receive in retirement. This type of pension is paid out monthly for life. If a pension plan’s assets aren’t enough to cover all the payouts that are owed, the company is responsible for the rest of the payment.

Defined contribution pension plans

Defined contribution pension plans specify the amount you and your employer contribute to the plan, but not how much you will receive in retirement. The amount you receive will depend on the plan’s investment performance. This type of pension is available in full upon retirement.

Pension Consolidation

A pension plan is not limited to one employer. In fact, you may have multiple pension plans from different employers throughout your career.

There are tools available for those who find themselves with more than one pension plan, such as pension consolidation and transfer.

The essence of pension consolidation is summarized well by the financial advisers at Black Lion. They say, “In a nutshell, pension consolidation means combining most or all of your pension pots into a single one. Determining the right course of action will depend on several factors, including the types of pensions you have, how much they are worth, how well they are being managed, and whether you have any special guarantees attached to them.”

It’s often the case that consolidating your plans will improve investment performance and reduce costs and fees associated with certain plans.

How To Consolidate Your Pensions

The first step in any pension consolidation is speaking with an expert. Pension consolidation experts are well-versed in all aspects of pensions, allowing them to provide you with the best possible advice.

Here are some questions pension consolidation specialists will ask when speaking with you: How many different types of pension plans do you have? How much money is being put into each plan? What special guarantees does each pension plan have? How old are you and when do you want to retire?

Once your specialist has all the information they need, they will recommend a course of action. There is no one-size-fits-all answer: every person’s situation is different and requires its own unique approach. Some pension consolidation specialists will recommend transferring certain plans, while others may advise consolidation.

What Now?

Wherever you are in your career, now is as good a time as any to learn about pensions and consider speaking with an expert. Managing pensions can be a complicated process, but it’s well worth the time and effort.

 

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