Best 1 need to know – What kind of pension plans are there?

What kind of pension plans are thereWhat kind of pension plans are there – There are two basic types of pension plans: defined-contribution plans and defined-benefit plans. The plans differ in how benefits to retired employees (formal: pension recipients) are determined/calculated, and who bears the ultimate risk associated with the number of future benefits to be paid to retired employees.

For accounting purposes, defined-benefit plans can be further broken down into sole-sponsored, jointly sponsored and multi-employer plans. These sub-types dictate how a sponsor accounts for the plans, and differ in the number and types of entities sponsoring the plan as well as how risk is shared between them.

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For financial reporting purposes, there is only one concern, pensions and their reporting are to complex!

General concerns represent:

  • Contributions by employers (government, industry-wide or individual entity plans) and employees is a matter of continuous debate and (co-)sponsors may be requested to increase their average contributions when shortfalls or lower earnings occur.
  • Because of the long-term nature of pensions in general small increase of pension charges over a long period of time to all sponsors are created, to establish trust in the system.
  • The main issues in pension plans are the aging of (retired) members and the low inflow of younger employees joining a pension plan over a significant part of their employed life.

Defined-Contribution plan

In a defined-contribution plan, the employer specifies how much it will contribute to the pension plan. In other words, the employer’s total payments under the plan (and employee contributions, if any) are known up front.

If you’re a member of the scheme through your workplace, then your employer usually deducts your contributions from your salary before it is taxed. What kind of pension plans are there

In a defined-contribution plan an employee ‘saves’ a pension pot (those will be the only fund available for pension payments) that the employee (and wife children) may use in a way as regulated in the pension plan and deemed useful by the employee. For example….. What kind of pension plans are there

The retired employee can access and use the pension pot in any way the retired employee wish from the pension age (to retired employee, a spouse, civil partner or dependants). What kind of pension plans are there

When the employee retires, the retired employee’s pension provider will usually offer the employee a retirement income (an annuity) based on the employee’s pot size, but the employee does not have to take this and it isn’t the employee’s only option.

The retired employee can: What kind of pension plans are there

  • Take the whole pension pot as a lump sum in one go. A part may be tax free and the rest will be subject to income tax and taxed in the usual way. What kind of pension plans are there
  • Take lump sums as and when the retired employee need them. A part of each lump sum may be tax free and the rest will be subject to income tax and taxed in the usual way. What kind of pension plans are there
  • Take a part of the pension pot (or of the amount the retired employee allocates for draw-down) as a tax-free lump sum, then use the rest to provide a regular taxable retirement income (an annuity). What kind of pension plans are there
  • Take a part of the pension pot as a tax-free lump sum and then convert some or all of the rest into a taxable retirement income (known as an annuity). What kind of pension plans are there

The size of the pension pot and amount of income the retired employee may become when retired depends on:What kind of pension plans are there

  • How long the retired employee saved for the pension plan (working life, 10 years, 20 years etc.)
  • How well the retired employee’s investments have performed
  • How much the retired employee paid  into the pension pot
  • How much the retired employee’s employer paid in (if a workplace pension)
  • The choices the retired employee makes on the retirement date
  • How much the retired employee take as a cash lump sum
  • Annuity rates at the time the employee retires – if the employee chooses the annuity route
  • What charges have been taken out of pension pot by pension (insurance) provider
Something else -   M and A

Defined benefits plan

A defined-benefit plan specifies the pension amount that employees receive in retirement, and the employer guarantees this defined amount. In other words, the risk of ultimately funding the promised defined benefits is borne by the employer, which is the plan sponsor. What kind of pension plans are there

Defined benefit pensions pay out a secure income for life which may increase each year.

Defined benefit pensions are a dying breed, an employee who worked for a large employer or in the public sector might have one.

The employer is at risk and contributes to the scheme and is responsible for ensuring there’s enough money at the time you retire to pay your pension income. The employee can or has to contribute to the scheme too. What kind of pension plans are there

The plan usually continues to pay a pension to a spouse, civil partner or dependants when the insured employee dies.

Sole-sponsored Pension Plan What kind of pension plans are there?

A sole-sponsored pension plan is a defined-benefit plan or defined contributions plan in which only one group of companies (parent and closely held subsidiaries) or one company bears the risk and rewards with the plan members, who are current and retired employees. What kind of pension plans are there

This type of defined-benefit plan is most often seen in the private sector where the employer is the sole sponsor, while a defined-benefit plan in the public sector is mostly organised in jointly sponsored pension plans. There are many similarities with the jointly sponsored pension plans (having a representative governance body), except off-course sharing risk and rewards between sponsors and/or members. What kind of pension plans are there

Jointly Sponsored Pension Plan

A jointly sponsored pension plan is a defined-benefit plan or defined contributions plan in which an employer shares risks and rewards Jointly Sponsored Pension Planin the plan equally with the plan members, who are current employees and retirees. Since there are usually many individual plan members and sponsors, a representative governance body is typically formed to represent all of them collectively as a plan sponsor (for example an employee union or federation (employees) and the key industry body (employers)).

Something else -   Multi-employer Pension plans

This type of defined-benefit plan is most often seen in the public sector, while a defined-benefit plan where the employer is the sole sponsor is more typical of the private sector (see sole-sponsored pension plan). However, jointly sponsored pension plans are also quite common vehicles in industry wide organised pension plans (for example building and construction industry or mining industry). What kind of pension plans are there

Multi-employer plan

A multi-employer pension plan is a defined-benefit plan or defined contributions plan where two or more employers act as plan sponsors for their respective groups of employees. All of the employers contribute into a single pension fund, and the amount of these contributions is determined by legislation or one or more collective-bargaining agreements.

Different schemes will have different charges and different investment choices. Some may also restrict who can join and how much can be paid in each year. The employer decides which multi-employer pension scheme it wants to use (sometimes with involvement of a workers’ council). What kind of pension plans are there

Also read: UK Money Advice Service

What kind of pension plans are there

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