A pension is a fund into which the state, an organization and/ or an employee pay money, in order to finance retirement. This allows people to stop working when they are older, whilst still being able to have access to a monthly income or alternatively a lump sum of money that has been saved over the years.
Pension schemes can generally be divided into three different types, although each type can have different characteristics depending on the country, state or industry you are in.
- State pension – a pension paid by the state when somebody reaches state pension age. It is normally financed by the employee and /or employer during the employee’s active working life through monthly taxes taken out of the employee’s wage and/ or by the employer’s compulsory social security contributions. Employees generally build up a state pension in the country / countries they live and work in, providing they have worked for a certain minimum amount of years. The monthly pay is usually the same for everybody, regardless of how much the employee previously earned.
- Workplace pensions – pensions provided by an employer, union or work sector. Other names used to describe this type of pension include occupational, company or employment pensions. Participating in a workplace pension is often voluntarily and not all companies offer this option. In some cases employers also make contributions to this scheme for their employees in addition to the payments the employees make into this fund. This pension would be in addition to the employee’s state pension.
- Personal pension – a private pension scheme contracted by individuals via banks, insurance companies or pension plan providers. These are completely separate from any work related schemes, but are a good alternative for those who do not have access to a workplace pension or if they have reached the maximum contribution on that workplace pension and want to top up their pension further. This pension would again be in addition to other pensions, so one could receive pensions from three different sources.
Today’s challenge is for you to check the pension options you are entitled to and / or participating in, find out how much you currently have in your pension pot and how much you would receive monthly if you were to retire now. Bear in mind that most pension plans have a fine if you start withdrawing from it before the agreed or legal retirement age.
Once you’re up-to-date regarding your pensions, check in with the rest of us in the Facebook group or let us know via Twitter or Instagram with #31DayChallengeToFE. There’s more on pensions in Step 41: An Introduction to Pensions, Step 42: State Pensions, Step 43: Workplace Pensions, and Step 44: Personal Pensions if you’d like to find out more.