Every employee is expected to set aside a part of their income while servicing for their retirement.
Every employee would love some funds to fall back on after retirement. This is because there may be no guarantee of a stable means of livelihood afterward. In this article, you’ll learn the meaning of pension, how it works, and the types.
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What Is A Pension?
Pensions are a retirement plan where the employer deposits money during the employee’s years of service.
Pensions are payable by you, the company, and your family, depending on the chosen plan.
When the employee retires, the pension serves as a daily monthly income until death. The government also contributes to your pension in form of tax relief. You can pay into different pension accounts at will, which is based on your income.
It is important to note that pensions are normally invested in stocks and shares. Hence, your funds can be affected by inflation as well as deflation.
How Does It Work?
Traditionally, the value of an individual’s accumulated throughout the employee’s time while in active service.
The longer an employee work in an organization, the higher the pension.
Also, when an employee works in a company for some years, they become vested in the company. This means they are entitled to their pensions, not minding their position, even if they were fired.
Benefits Of Pension
These are a few benefits of having a pension as a retirement plan.
- If your workplace has a pension
the scheme, then your employer is obliged to contribute to your pension.
- The government gives tax relief on
payments made to your pension account. This entails the government paying 25% of your contribution to a certain limit.
- No income tax and capital gain tax.
This entails that you are not obliged to pay tax for any dividends gotten from shares. Also, you get a waiver from paying capital gain tax on profits made during investments.
Types Of Pension
- COMPANY PENSION
The company does this pension, and the employee contributes a percentage monthly to fund the pension account.
Nowadays, employers are mandated to have a pension scheme and automatically enroll their employees.
Legally, in some States, the employee contributes up to 5% of his income while the employer contributes 3% into the pension account.
Also, the government contributes to it through tax relief.
- STATE PENSION
This describes the pension you’ll receive from the state government once you get to retirement age, so far, you have at least a 10-year national insurance contribution.
The government pays you a guaranteed income for the rest of your life. Note that the state pension may not give you the wish to have. Rather, it serves as a supplementary income.
- PERSONAL PENSION
As the name implies, a personal pension entails having a private account for your pension.
When you open a pension account, selecting a provider, the duration of your investment, and the amount to be invested monthly is up to you.
The government will also contribute through tax relief as with the workplace or company pension. Note that the value of your investment can go down or go up due to economic circumstances.