Pensions are associated with elderly people because they rely on pensions for their income, hence why they’re known as pensioners. However, pensions are vital to know about no matter how old you are.
Essentially, a pension is a fund which you save into whilst you’re still in work to make sure you have money to live on in your retirement (AKA when you won’t have an income from your job anymore). That’s why people much younger than the pension age should know about them and why they should consider saving up for retirement: it usually depends on you saving long before you actually retire.
There are multiple varieties of pensions (they can differ by country too):
- State pensions are provided by the government, and come in two flavours:
- Contribution-based, where being allowed to get the pension depends on you paying into it whilst you’re working through a special tax such as National Insurance in the UK.
- Socially-based, where being allowed to get the pension doesn’t depend on you paying into it. Some are restricted based on the pensioner’s income or wealth in order to target the pensions at those in greater need.
- Employment pensions are linked to your job(s) and are often based on contributions from both you as a worker and your employer(s).
- Trade unions can offer pensions as a benefit of membership, either taken directly from regular membership fees or indirectly via an organised deal with a third-party pension provider.
- Personal pensions are purchased by yourself from a privately pension provider. They typically entail greater freedom than state-funded or directed schemes to invest your pension funds in financial products like stocks or shares, however this also entails greater risks since your investment could increase or decrease.
Pensions can have tax deferrals or deductions applied to them so it’s worth checking to see whether they apply to your pension scheme as it could save you money.
There are a few considerations you want to take note of, alongside others, when evaluating the return on your pension:
- The amount that you put into your pension fund.
- The amount the investment grows or shrinks by.
- Stability of your country’s political/economic system.
Inflation can mean that even if your investment increases nominally, the real return on your investment is in fact decreased.
Stability is slightly more broad and nebulous, however some countries, such as Switzerland, have a more stable economic and political climate and thus are less likely to affect your investment in unexpected ways (e.g. seizure of your pension funds, total replacement of the way pensions are done in the country etc.) than others, such as Somalia.
Which countries are stable or not could change over time so you may find it helpful to research which countries offer the best investment climate for you to save in.
You should be aware of pension liberators, organisations who offer to let you take out a proportion of your pension before you retire. They can charge a hefty commission. Speaking to an FCA-regulated financial adviser or your pension fund when you want to explore your options for taking part of your pension out before you retire could be a wise move, as opposed to allowing a pension liberator to “liberate” your pension from you! Nevertheless, you may decide to settle for the services of a pension liberator, so the best thing to do in that case is likely to be shopping around to find the best deal you can, at the most reputable, integrity-driven pension liberator.
If you aren’t in the UK, searching for the pension counterpart in your country may be more useful.
Original article by Overdraft.com. All rights reserved.
Please note that this is for informational purposes only and doesn’t constitute financial advice.
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