You’ve worked most of your life and it’s time to reap the benefits. There are several different ways to maintain income throughout retirement and one of those is via a pension. A pension is simply a vehicle in which you receive distributions on a variety of calculations and variables. Pensions have been around for decades, and it’s important to understand the various types.
Keep in mind that pensions from the government all the way down to independent pensions, they all will operate differently, meaning the distributions will vary person to person.
First is the state pension, which as you can guess is paid from the government. For the full details of how the pension operates, you can view a detailed PDF document here.
At a high level, there have been 3 different kinds of pensions.
- Graduated Pension
- State Earnings-Related Pension Scheme
- State Second Pension
In order to be eligible for these pensions, you had to make National Insurance contributions. Also, other factors include age and how many years you’ve been employed. A comparison across other countries include Social Security in the United States.
Job Related Pensions
The second and more well-known pension are operated through an employer. Known as a defined benefit, these are funds used to pay long-term employees through employee contributions. Distributions are calculated through various factors that include years worked, average earnings and other proprietary data points.
One of the things to consider with employer pensions are they are not guaranteed to be distributed. Meaning you’re relying on your employer to properly handle and manage those funds. A simple Internet search will yield underfunded and cancelled pensions due to lack of oversight or simple ignorance.
While these can provide solid distributions, it’s wise to have a backup plan in case the company suddenly files bankruptcy.
Hedging Pension Benefits
To hedge against potential pension failure, you can simply look to the stock market. While pension funds are invested in the open market to generate yield, you can take the same measures by putting money away in an investment account.
Have a second nest egg at work will alleviate the risk a bit by ensuring you have retirement income being generated from two sources. Be sure to talk with a financial professional before making any investment decisions.
With uncertainties such as Brexit and geopolitical issues, it’s important to understand at the very least how pensions work. If you’re enjoying the benefits of a healthy pension plan, keep in mind that while they work well, it’s never certain the plan will be around tomorrow. Proper risk diversification is a proper way to protect yourself from unseen circumstances.