Personal Money Management 101

Pension Planning : Pension Advice

this site Web
Home 500DollarPayday.Loan Site Policy Investment Stock Investing Technical Analysis Financial Statements Real Estate Mortgages Pension Planning Debt Solutions FOREX Trading Financial Derivatives Tax Efficiency Financial Advisors Personal Finance Articles Software & Books Site Map Resources on the Web
  • Why bother?
  • More people living longer
    arrow More pension funds needed.
  • Lower birth rate
    arrow Fewer people paying into pension funds
  • Today's workers can't rely on state / next generation to support them in old age.

  • How pensions work
  • On reaching retirement pension fund is used to buy an annuity
  • This pays a monthly sum for the life of the holder
  • A cash sum may also be withdrawn from the pension fund before annuity is purchased
  • Annuity does not have to be bought from company that managed pension fund arrow shop around fo best deal
  • Types of annuity
    • "flat rate" - pension stays same for duration of annuity (if inflation, actual value of pension falls)
    • indexed - pension rises with inflation (pension maintains its buying power
    • initial rate of indexed annuity is lower than "flat rate"
    • some annuities offer widow's benefits, ie a (possibly reduced) payment continues to partner should annuity holder pass away.

  • Company Pension Schemes
  • Where available, generally a good deal
  • Employer pays as much as - if not more than - employee
  • 2 flavors:
    • Individual builds own pension pot
    • Final salary scheme - actual pension based on final salary (over last few years) & length of scheme membrship (regardless of actual amount paid in)
      • often index-linked, pension rises with inflation
  • Final salary scheme generally regarded as better deal but now being phased out by many UK employers.

  • Compounding
  • Returns on pension funds are compounded (re-invested)
  • If you save $100 a month with 5% added at each year end:
    • after 20 years you have $41,663
    • after 40 years you have $152,208
    • invest for twice as long, get 3.65x the funds!
  • Effect of compounding arrow the sooner you start the better.

  • Tax breaks
  • Most governments offer some form of (often quite generous) tax incentives for pension savings
  • Investments must be held in official pension funds
  • Funds may not be withdrawn until fund holder reaches a certain age (may be some exceptions eg for sportspeople who retire early)

  • A long-term investment
  • Can afford to be adventurous
  • Stockmarket is good core investment either through:
    • Low cost market index tracker fund, or
    • Individual stocks and shares
      • be sure to invest in a broad range of stocks, eg at least 12, across different industry sectors.
    • Avoid managed funds - fund managers are deleterious to your wealth and on avaerage, after fees, fail to beat the market as a whole. (of course some managers do beat the market in some years, the problem is it's impossible to tell in advance which ones they are)
  • Diversification into real estate, overseas investments etc is advisable
  • Pension funds can also include art & other collectibles - fine if you have specialist knowledge, otherwise best avoided.

  • Equity Release
  • For many people largest asset is their home
  • Many older people move from (more expensive) larger house to (cheaper) condominium, thus releasing funds
  • Equity release schemes buy all or part of your home in return for an income for life
    • You are allowed to remain in your home (scheme doesn't get its share until you pass on)
    • Negative implications on dependant's inheritance.