For a very long time, people have had to live with the information of “Pension is for old people” and since this is 2024, we thought of giving some clarity to it.
While a pension is commonly associated with retirement benefits for older individuals, it is a financial arrangement that individuals contribute to throughout their working years to secure income after retirement. Pension benefits can be accessed when an individual reaches retirement age, but the concept is not exclusive to old age.
Why the idea that pensions are for Old People?
Individuals who have worked thoroughly for a while as deemed fit by them are entitled to a pension. However, since retirement is linked to receiving a pension, people mostly think that pensions are exclusively for older individuals.
This perception comes from the traditional association of pensions with retirement age. When individuals have dedicated a substantial part of their lives to work and decide to retire, it’s common for them to access their pension benefits to support their financial needs during their later years.
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Who can receive a pension?
Pensions are essentially a form of financial security individuals contribute to throughout their working lives, and the benefits can be accessed at various stages, including earlier retirement or under specific circumstances.
Let’s first talk about the most common recipients of Pensions:
The Retirees
These people have reached the official retirement age as defined by their pension plan or government regulations. Retirees receive regular pension payments as a form of income replacement during their retirement years.
Early Retirees
Some pension plans allow for early retirement, permitting individuals to receive pension benefits before the standard retirement age. However, early retirees may face adjustments to their benefits based on factors such as the age at which they choose to retire.
People with Disability
Individuals who become disabled may be eligible to receive a pension if their disability prevents them from continuing to work. This is often subject to medical assessments and the specific terms of the pension plan.
Withdrawals Under Specific Circumstances
Some pension plans allow for partial or full withdrawals under certain circumstances, such as financial hardship or specific life events. The conditions for such withdrawals are usually outlined in the pension plan documents.
Surviving Spouses or Dependents
In the event of the death of a pension plan participant, surviving spouses or dependents may be entitled to receive survivor benefits. These benefits can provide financial support to the family members left behind.
For people who are still in service, the withdrawal is usually about 25% or less depending on the pension plan.
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How do Pensions work?
The organization in charge of coordinating pensions is the National Pension Commission. This body follows a regulation that requests that employers or organizations with three or more employees deposit some amount of money into the Retirement Savings Account (RSA) and this is a micro pension plan.
This organization also has pension operators that get things done and in order, they are:
- Pension Fund Administrators
- Closed Pension Funds Administrators
- Pension Fund Custodian
- Pension operations secretariat
- Pension Transitional Arrangement Directorate
All of these departments ensure that pensions are remitted and disbursed accordingly. Also, Pension Plans are of different types and the major ones include:
The Defined Benefit Plan
In a Defined Benefit Plan, the employer guarantees a specific retirement benefit amount to the employee. This amount is typically based on factors such as the employee’s salary, years of service, and a predetermined formula set by the employer. The employer bears the investment risk and is responsible for ensuring that there are sufficient funds to meet the promised benefits when the employee retires.
The Defined Contribution Plan
The Defined Contribution is another type of pension plan that differs from the Defined Benefit Plan. In a Defined Contribution Plan, employees and employers make contributions to individual accounts, usually through regular payroll deductions. The ultimate retirement benefit is based on the total contributions made and the investment performance of those contributions over time.
Simply Put:
Defined-Benefit Plan:
- Clearly outlines the retirement income an employee will receive upon retirement.
- Employer contributions are often uncapped, potentially exceeding 25% of pay.
- Usually, there is no dollar limit on annual contributions.
- Administration costs are generally higher.
Defined-Contribution Plan:
- Specifies the required contributions for an unknown retirement benefit.
- Employer contributions are often capped at 25% of pay.
- Annual contributions usually have a dollar limit per person.
- Administration costs are generally lower.
Depending on a pension plan, it is usually a good idea to have something to fall back on whether you are a retiree, early retiree, or the circumstance calls for it. Pensions are disbursed in due time and according to the purpose for which it is requested.