Why you Need a Pension Plan

Pension Plan

The need to have a pension plan cannot be overemphasized. Often times we go about the normal course of our lives and businesses, paying little attention to the future.

Pension Plan

It is normal for us not to flinch when it comes to spending on luxury items but to give little or no concern to more important needs like investing. Of all the forms of investing and future finance planning, having a pension plan is an ultimate necessity.

A pension plan is simply a retirement plan where contributions are made by the employer and employee monthly and set aside for the future benefit of the latter. This is done bearing in mind that an employee would work until a certain age and retire. Pension is therefore a bailout strategy that enables the retiree still maintain a suitable standard of living when he/she is sick or too old to work.

In light of this, many pension fund administrators and individual retirement arrangements exist today. The challenge, however, lies within the enlightenment of people. Inasmuch as the government ensures that its staff have registered pension fund accounts, some private employment providers overlook it. Strangely, a few individuals do not see the need for it either. Below are just few reasons why there is ardent need to have a working pension plan.

  • Long-term Savings

This is unarguably the most apparent reason there is- the need to save for your future. Those who oppose setting money aside for pension, believe that it is money tied down; that is, money that can be used for investment in lucrative businesses or investment in bonds and shares. While some ideologies around that are not technically incorrect and investments can yield greater sums. The question is – how diligent can you be in saving for your old age?

Having a pension plan, even as an entrepreneur, takes the pressure of saving off you. This is so because these contributions are deductible. They are allowable expenses and they are usually removed from your gross salary before your net is remitted. In essence, you might almost not notice it! In the US, you can generally start having access to your pension account around the age of 55. Hence, it offers you an avenue to save for a longer period of time.

  • It is Tax- Free

Now if you were one of those who felt investing was a better deal than saving for pension, well think again. Most IRA’s are tax free or offer tax-free growth. If you opt to have your pension cash at hand, you would pay tax on it. Whereas your pension account can grow without taxation and other levies to stunt it. If you put money into a personal pension scheme, it qualifies for tax relief; rather than lose it to the government, it ends up in your pension account.

Having a pension account also reduces your tax payable. Since pension is an allowable deduction, it is removed from your initial salary before tax is charged. This simply means that it reduces your taxable income. For example; if you had 100 dollars and you were to pay a tax of 10% on that, your tax would be 10 dollars. However, if you pay 20 dollars into your pension account, you only have to pay a tax of 10% on the remainder. You would therefore only pay a tax of 8 dollars and have some of your money saved. It is a win-win situation.

  • It serves as a contingency plan

While it is not advisable to take a loan out of your pension plan, certain contingencies may arise that leave you cornered. Issues ranging from exceptional medical bills or mortgage payment challenges may require that you take out loans. Rather than go to banks and other financing houses that will often drag you into deeper debts and challenges, your pension fund can bail you out at cheaper costs.

It can also help as a capital for your fall back business. That is, where you have a business idea that you have not been able to push as a result of lack of proper funding, your pension fund can be a source of capital. Truth is, when you retire, you go home with a tax-free sum. You can choose to get it monthly or opt for a lump sum, depending your scheme.

When you are signed up or registered under a good pension scheme, you have a ton of money to fall back on. In essence, if you wait till you retire before you lay your hands on the money, you have a stable retirement fund for contingencies, business that would work for you and a comfortable and safe landing.

  • Your family Benefits

Where you are a family person, your pension account can serve not just you but also your family. Unexpected occurrences like death or disability of the chief provider of a family can cause a sudden shift in the standard of living of the entire family- especially when there is no life insurance. Depending on the type of pension plan you are on – either a defined benefit plan or a defined contribution plan – your family can be paid a certain sum per month to cater for livelihood.

You can rest assured that college fees, feeding, accommodation and other basic amenities of will be settled after you are gone. Various states have their rules when it comes to settlements after divorce. Your ex-spouse may or may not get part of your pension; just be careful when getting into certain agreements and you would be good to go.

  • It is safe

Finally, pension is a safe form or investment. These days, there are too many possible investments with varying levels of risk.  Many offer mouth-watering profit and dividends but put your capital at risk. Investing in governmental backed bonds and treasury bills would not provide high returns. However, your pension remains safe. At least not until you put it in risky investments.

Your pension is basically fixed and secured through the ups and downs of the market. If you decide to enter investments that are risky, and it goes sideways, you still would not lose all of your money. Get your pension fund account going and you can enjoy all of these benefits and more.