Pensions Explained (In Layman Terms)

A pension is a way to save for the future. It is a long-term investment that is shared by your employer as a job benefit. Money is deducted each pay period during your working years. Most employers contribute to this "pot" of money. The money is invested in various ways to build up a retirement fund. This is known as a pension plan.

It is important to have a pension plan. It is hard for younger people to conceive, but eventually everyone will be too old to work. Social security provides a partial income based on your earnings over the course of a lifetime. However, it is likely not going to be enough to afford to continue your current lifestyle. It is the responsibility of everyone to make sure they have invested in a pension plan either through their employer or through private investment. There are plans called 401K Plans that you can participate in.

The longer you work, the later you will take your pension plan benefits. The later you take these benefits, the higher your monthly payments will be. This is also true for Social Security benefits. Most people want to have enough in their golden years to make them truly golden. This means having money for extra things like trips and eating out in restaurants occasionally. With a good pension, this is possible. As a senior citizen, it is likely that you will be able to live on a bit less. For example, you won't need the expenses of transportation and clothing as you do during your working years.

With either a personal or company pension plan, you will be eligible for certain tax benefits that you would not otherwise qualify for. Since retirement saving benefits the Government, a personal pension plan is a way to get tax relief. Whatever the tax rate is at the time you are making payments to the pension plan, that same amount is entered into the funds. This is also true for those that do not even pay taxes. Tax payers who pay a high rate of tax can often get a higher refund at end of the tax year than they normally would have.

A pension investment plan is unlike bank savings. Funds are not to be touched until the day finally arrives when it is time to rest, as the word "retire" implies. Then, along with Social Security benefits, you can receive a "paycheck" every month for the rest of your life.