Retirement Plans And Retirement Schemes

Retirement Plans (USA) are also referred to as Pension Schemes (UK) and Superannuation Plans (Australia). All have one thing in common and that is, that the plans provide the retiree with a steady or regular income during retirement. This regular stream of income is often referred as an annuity.

As steady income is generally no longer earned in retirement, it is essential to commence and contribute to a pension plan as soon as possible. Retirement plans, Pension Schemes and superannuation plans may be set up by employers, insurance companies, the government and other employer groups. A retirement plan provides a payout at retirement and may be dependant on the the plans performance and the amount of money contributed by the employer or member.

The Retirement Plan, Pension Scheme or Superannuation Plan generally work via contibutions into a members account. These contributions can be invested in the stock market and all returns whether good or bad are credited to the individuals account plan.

USA Retirement Plans:

Examples of USA Retirement Plans would be Individual Retirement Accounts (IRAs) and 401(k) plans. These type of retirement plans make the member responsible for selecting the types of investments toward which the funds are allocated. The investment of funds may range from mutual funds to selecting individual stocks or other securities. Because members funds are generally invested in stocks investment plans may increase or decrease.

Individual Retirement Arrangements

An Individual retirement account (IRA) is a custodial account that can be established by an individual in order to save money for retirement on a tax-deferred basis. Some contributions may also be deducted from the members taxable income in the year of contribution.

401 (k) Plan

A 401(k) plan is a retirement savings plan funded by employee contributions which are often matched by employer contributions. Rules and regulations for 401(k) plans are established by the US tax laws. 401 (k) plan contributions are taken from pre-tax salary therefore reducing the amount of tax paid allowing the funds to grow tax free until withdrawn. 401 (k) plans are self maintained and portable. This enables the employee to have more control and make more decisions directing the future of their investment. Wisely invested 401 (k) funds will grow without being taxed and can be withdrawn when the age 59 ½ is reached. Once a 401k fund is withdrawn income tax is payable. Withdrawals prior to reaching the age 59 ½ usually require a penalty along with payment of taxes.

401k plans can be generally grouped into two categories:

Defined benefit plan:

The employer promises to pay a defined amount to retirees who meet certain eligibility criteria. A defined benefit plan usually links the benefit to the amount of service and is based on the final average salary. Employees can usually predict the monthly retirement income they might receive with this type of plan and might also be given the choice of a lump-sum benefit at retirement.

Defined contribution plan:

the plan defines the contributions that an employer can make and not the benefit that the employee will receive at retirement. A defined contribution plan is not a defined benefit so the employee cannot predict a monthly retirement income. If an employee leaves the company, they usually receive the proceeds in a current or deferred lump sum or annuity.

Australian Superannuation Plan

Superannuation is a system where money is placed in a fund to provide for a person's retirement.

Superannuation is a tax effective way of putting money aside during working life for use in retirement. It has been introduced and supported by governments, employers and trade unions due to concerns about the long-term costs of the ageing population.

Choosing the right investment strategy for a members superannuation plan can have a big effect on retirement benefits in the future. The importance of making an informed decision is vital.

Tips:

• Seek professional advise e.g finacial planner early in the working career
• If seeking professional advise research superannuation inorder to be prepared for a useful and interactive discussion
• Review superannuation investment regularly
• Rollover superannuation account into one to avoid administration costs
• Become Familiar with entry and exit fees
• Choose a fund that is flexible and possible to change investment strategies

UK Pension Schemes

Pension Schemes in the UK fall into two main categories: State Pension Scheme and Private Pension Scheme. The State Pension is set up by the State whereas Private Pensions are set up by an employer or private financial company.

Private Pension Scheme

Private Pension Scheme include Occupational Pensions and Personal Pensions. Upon retirement, Private Pension Schemes can be withdrawn as a lump sum and are tax free (up to 25% of the pension value). From the remaining assets, money will be paid at regular intervals into your nominated bank account. Since these schemes depends on the amount of money finally available , choosing the right investment strategy can have a big effect on retirement returns in the future.

Occupational Pensions:

Occupational Pensions may also be referrred to as Company pensions, Works Pensions and Superannuation Schemes. Occupational Pensions are run by some employers to provide a pension for their employees. Both employee and employer may make contributions.

Personal pensions:

Personal pensions are money purchase arrangements in which money and any additional contributions from an employer, is invested e.g in shares to build up your pension fund. Most personal pension providers require the employee to make payments on a regular basis, usually once a month. A type of private pension scheme, including a stakeholder pension scheme, run by banks, investment companies and building societies.