What Are Private Pensions and Are They Better than Government Ones?

 

State pensions are, for many individuals, the best insurance for the later years of their lives. However, these deposits are often subjected to how the economy of the country changes and can be affected by economic depressions or other major events. The recent Covid-19 pandemic is such an event. As a result, much of the country’s financial resources were diverted to resolving the crisis, leaving many unsure of how their pensions will be paid.

This having been said, the state is not the only one that enables individuals to contribute to their pensions. There are currently several trusted lenders and companies that offer private pensions. These have been around for many years, they operate in several countries around the globe and it is unlikely that a financial depression will ever render them unable to pay the pensions. However, the agreements that these companies offer are slightly different than the ones from the government, which can make it difficult to determine which one is better.

Two Types of Private Pensions to Consider

There are two types of private pensions that individuals can access. These are:

  • Defined Contribution Pension Schemes

These are defined by how much money an individual contributes to the pension fund. They can be arranged by the employer (and are a part of the employment agreement), or by yourself. With this scheme, the money contributed to the fund is invested by the private pension provider. Depending on how the investments perform, the total value of the pension can increase or decrease. When it comes to this type of private pension, it is important to keep in mind that some providers put the money in high-risk/high-reward investments during the first half you’re your contribution period and then shift their focus to low-risk investments as you approach retirement.

With this scheme, you can take the money however you want, making it great for individuals who want a lot of financial flexibility during their retirement years.

  • Defined Benefit Pension Schemes

As the name implies, these have a fixed contribution (that is usually based on an individual’s salary) and is paid by the employer. The amount of money that is contributed is also affected by how long you’ve worked for the employer. These are also known as career average schemes and tend to be more restrictive than defined contribution ones. This is because individuals only receive a fixed amount of money each month. This amount is usually based on salary as well as for how long an individual has worked for his employers.

Private Pensions Bundled Up with Health Insurance

Defined contribution pension schemes may also come with private health insurance attached to them. This applies to both the years of contribution as well as those of retirements. Keep in mind that his option is only offered by some companies and is usually reserved for individuals who contribute a certain amount of money each year.

Private Companies Can Offer More Stability

Private pensions are very similar to savings accounts, with the exception that you cannot tap into the funds until you retire. They can be extremely useful for individuals who want to make sure that they will have financial stability and independence during the later part of their life. However, the biggest advantage is the fact that the companies that offer these pensions invest the money across multiple countries, which makes the pension largely independent of the national economic situation. While an economic depression would have an impact on your pension pot, it would be relatively easy for the providing company to recover.

Generally speaking, private pensions do tend to be better than government ones, but they are not fail proof. Still, they do offer more flexibility and stability than regular ones, especially for individuals who rarely change workplaces.

Jackie

I’ve always disliked how little financial education most individuals have access to. The lack of information concerning how people should manage their income and expenses makes it difficult to have any sort of material stability as they go through life. However, properly balancing one’s income and expenses is not as hard as it may sometimes seem. In most cases, it is simply a matter of knowing how to think, not necessarily having the right information. I want to share this knowledge with as many people as possible. I’ve taken it upon myself not only prove that anyone can have a healthy financial life, regardless of income, but also that it is possible to passively save money.

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