A private pension is a plan into which individuals privately contribute from their earnings, which then will pay them a pension after retirement. It is an alternative to the state pension. Usually, individuals invest funds into saving schemes or mutual funds, run by insurance companies. Often private pensions are also run by the employer and are called occupational pensions. The contributions into private pension schemes are usually tax-deductible.
The first evidence of pension payments comes from the Roman Empire in the 1st century BC, but beginnings of private pensions go back to the 19th century. The first private pension plan in the USA was created in 1875 by the American Express Co. [1] But the growth of people coveraged by private pensions was relatively slow. In 1950, only 25 percent of employees in nonagricultural field were anticipated in some private pension system. [1] [2] [3]
At the start of the 2000s, governments of developed countries reduced the amount of money for providing pension security. As a consequence, employer-sponsored and individual products become more popular. Most of these private pension types invest in the financial markets, which brings some risks and uncertainty. For example, it can be the time difference between the date of conclusion of the contract and income stream in the future or very low rate of return if the pension manager decided to invest into low-risk savings products. Usually, a three-pillar pension system is introduced. The first pillar is related to state pensions, the second one to supplementary pensions, and the third one to voluntary individual (private) pensions. [4]
One of the most used private pensions is defined contribution plan. Each participant has his or her own individual account. Contributions are made to this account by an employer of a participant as a part of his or her wage. Each participant chooses some mutual funds, stocks, or other securities to invest this amount of money. The return of this investment is continuously credited or deducted from an individual's account. Money in this plan cannot be withdrawn without penalty until the participant's retirement age. [5]
Another possibility in the USA is Defined Benefit Plan. This plan pays some amount of money at the time of retirement regardless of the age of a participant. A monthly benefit depends on the number of years worked, salary at the time of retirement, and accrual rate. A defined Benefit Plan can be funded or unfunded. In a funded plan, the special fund for investing contributions of employers and participants is created. The return of investment is changeable, so there are not any guarantees of some level of future income. In an unfunded plan, there are no funds for paying benefits. The benefits to be paid are met by contributions to the plan or by some assets. [5]
In the UK, there are two main possibilities how to ensure additional money to the State Pension. Withworkplace pensions, the plan of savings for retirement is arranged by an employer. Part of your salary is automatically paid into the pension scheme every payday. [6]
The second possibility of private retirement savings is the use of a personal pension (also called "Private Pensions"). [7] This type of pension is arranged by the insured themselves. There are two types of personal pensions – the stakeholder pension where is required to meet some government limits and self-invested personal pensions where participants make decisions themselves about investment in their pension fund. [8]
The Pensions Act 2012, and amended in 2014, requires all employers to automatically enroll their workers into a Workplace Pension Scheme with the option to opt-out and re-enroll. [9]
Both types of private pensions share similar features. The amount of money the participants get in retirement depends on how much they have paid in, how long they have had the private pension, their health condition, and how well the pension fund's investments have done. Moreover, tax relief is provided to private pension participants. [10]
In Germany, there are three types of private pension plans that are recognized by the German government – Riester Rente, Rürup Rente and the Private Altersvorsorge. They all follow the strategy of the German government to reduce state-guaranteed pensions. [11] These plans are offered by insurance firms and are subject to approval by the German Pension Authority. Only approved pension plans qualify for the beneficial tax treatment. [12]
Germany's pension plans are hybrid defined-benefit plans with a minimum guaranteed outcome and a market-based outcome that depends on the performance of the underlying investments. These plans are flexible in investment strategy as long as they meet the expectations set by the government to receive beneficial tax treatment. All plans have tax-exemption from capital gains tax and dividend income tax during the accumulation phase of the plan. [13]
Riester Rente is designated for low-income earners and families who pay German income and wage taxes, employees who contribute to Public Retirement Insurance, civil servants, and more. It is necessary to contribute at least 60 euros per year to get government subsidies. In order to gain maximal government support, the participant is required to paid at least 4% of his/her annual income. It is possible to save at most 2,100 euros per year. The amount of government subsidies is between 154 euros and 300 euros depending on fulfilling some conditions. This plan is regulated by the German Government. The participant has to be at least 60 years old to draw money back. All money you contribute to the pension system is guaranteed. [12] Due to this guarantee the Riester Rente is restricted to invest in secure, low-return investments.
Rürup Rente, named after Bert Rürup, is primarily designated for people with high tax burden, but everyone can take part in. There are no government subsidies. However, income tax relief is provided on contributions to this plan, in addition to the tax relief is connected with this plan. Rürup Rente provides a lifelong pension which is guaranteed. The pension payment cannot start before reaching the age of 62. [12]
Private Altersvorsorge is designated for everybody that prefers flexibility payout. It has less tax-advantages in return for minimal government restrictions. It must be held at least 12 years and be paid out after the age of 62 in order to claim the tax benefits on the payout. Flexible plans can be paid out as a lump-sum (all at once) or as a lifelong income. The funds in the contract can also be inherited. The money can be withdrawn anytime before the age of 62 but will incur full capital gains taxation if done so. [14]
There are two occupational mandatory supplementary plans – ARRCO (Association des régimes de retraites complémentaires) for executive workers and AGIRC (Association genérale des institutions de retraite des cadres) for non-executive workers where employees and employers have to contribute. If the participant do not contribute all the time, their pension rates are lower. The benefits can be paid out from the age of 60, usually as annuities. [15]
Next, there are two voluntary pensions schemes – Funded occupational pension plan – PERCO (Plan d’épargne retraite) and Individual retirement savings plan - PERP (Plan d’épargne retraite populaire). [14]
In PERCO, employers have to offer several investment funds to employees with different portfolios. Employees can save at most one quarter of their gross annual salary. For employers, it is compulsory to contribute, but the minimum amount is not established. The maximum amount saved in a year horizon is 5,149 euros in total of employer's and employee's contributions. It is not possible use the money before retirement. Contributions made by employees subject to income tax, but return of investment and retirement benefits not. [14]
PERP is form of individual pension contributions which provides additional income in a retirement. The conditions of frequency and amount depend on pension insurance plan. Insurer is obliged to guarantee progressive increase of minimal level of benefits. Usually, benefits are paid out as annuities, but lump sum is also possible. Participating in PERP has also a tax benefit, because amount of money deposit to this scheme is tax-deductible up to 10% of your last year income. [14]
In the United States, a 401(k) plan is an employer-sponsored, defined-contribution, personal pension (savings) account, as defined in subsection 401(k) of the U.S. Internal Revenue Code. Periodic employee contributions come directly out of their paychecks, and may be matched by the employer. This pre-tax option is what makes 401(k) plans attractive to employees, and many employers offer this option to their (full-time) workers. 401(k) payable is a general ledger account that contains the amount of 401(k) plan pension payments that an employer has an obligation to remit to a pension plan administrator. This account is classified as a payroll liability, since the amount owed should be paid within one year.
A pension is a fund into which amounts are paid regularly during an individual's working career, and from which periodic payments are made to support the person's retirement from work. A pension may be:
A pension fund, also known as a superannuation fund in some countries, is any program, fund, or scheme which provides retirement income.
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A registered retirement savings plan (RRSP), or retirement savings plan (RSP), is a type of financial account in Canada for holding savings and investment assets. RRSPs have various tax advantages compared to investing outside of tax-preferred accounts. They were introduced in 1957 to promote savings for retirement by employees and self-employed people.
The Employee Retirement Income Security Act of 1974 (ERISA) is a U.S. federal tax and labor law that establishes minimum standards for pension plans in private industry. It contains rules on the federal income tax effects of transactions associated with employee benefit plans. ERISA was enacted to protect the interests of employee benefit plan participants and their beneficiaries by:
Tax advantage refers to the economic bonus which applies to certain accounts or investments that are, by statute, tax-reduced, tax-deferred, or tax-free. Examples of tax-advantaged accounts and investments include retirement plans, education savings accounts, medical savings accounts, and government bonds. Governments establish tax advantages to encourage private individuals to contribute money when it is considered to be in the public interest.
A retirement plan is a financial arrangement designed to replace employment income upon retirement. These plans may be set up by employers, insurance companies, trade unions, the government, or other institutions. Congress has expressed a desire to encourage responsible retirement planning by granting favorable tax treatment to a wide variety of plans. Federal tax aspects of retirement plans in the United States are based on provisions of the Internal Revenue Code and the plans are regulated by the Department of Labor under the provisions of the Employee Retirement Income Security Act (ERISA).
The Pension Benefit Guaranty Corporation (PBGC) is a United States federally chartered corporation created by the Employee Retirement Income Security Act of 1974 (ERISA) to encourage the continuation and maintenance of voluntary private defined benefit pension plans, provide timely and uninterrupted payment of pension benefits, and keep pension insurance premiums at the lowest level necessary to carry out its operations. Subject to other statutory limitations, PBGC's single-employer insurance program pays pension benefits up to the maximum guaranteed benefit set by law to participants who retire at 65. The benefits payable to insured retirees who start their benefits at ages other than 65 or elect survivor coverage are adjusted to be equivalent in value. The maximum monthly guarantee for the multiemployer program is far lower and more complicated.
Superannuation in Australia, or "super", is a savings system for workplace pensions in retirement. It involves money earned by an employee being placed into an investment fund to be made legally available to members upon retirement. Employers make compulsory payments to these funds at a proportion of their employee's wages. From July 2024, the mandatory minimum "guarantee" contribution is 11.5%, rising to 12% from 2025. The superannuation guarantee was introduced by the Hawke government to promote self-funded retirement savings, reducing reliance on a publicly funded pension system. Legislation to support the introduction of the superannuation guarantee was passed by the Keating Government in 1992.
A defined contribution (DC) plan is a type of retirement plan in which the employer, employee or both make contributions on a regular basis. Individual accounts are set up for participants and benefits are based on the amounts credited to these accounts plus any investment earnings on the money in the account. In defined contribution plans, future benefits fluctuate on the basis of investment earnings. The most common type of defined contribution plan is a savings and thrift plan. Under this type of plan, the employee contributes a predetermined portion of his or her earnings to an individual account, all or part of which is matched by the employer.
The Pension Protection Act of 2006, 120 Stat. 780, was signed into law by U.S. President George W. Bush on August 17, 2006.
The Public Employees Retirement System (PERS) is the retirement and disability fund for public employees in the U.S. state of Oregon established in 1946. Employees of the state, school districts, and local governments are eligible for coverage. A health insurance plan for covered retirees was added to the program in 1987. The program is administered by a twelve-member board of trustees, appointed to three-year terms by the Governor subject to confirmation by the Senate, which also administers the Oregon Savings Growth Plan, a voluntary deferred compensation plan established in 1991.
Defined benefit (DB) pension plan is a type of pension plan in which an employer/sponsor promises a specified pension payment, lump-sum, or combination thereof on retirement that depends on an employee's earnings history, tenure of service and age, rather than depending directly on individual investment returns. Traditionally, many governmental and public entities, as well as a large number of corporations, provide defined benefit plans, sometimes as a means of compensating workers in lieu of increased pay.
Pensions in Canada can be public, private, and collective, or come from individual savings.
In France, pensions fall into five major divisions;
A Solo 401(k) (also known as a Self Employed 401(k) or Individual 401(k)) is a 401(k) qualified retirement plan for Americans that was designed specifically for employers with no full-time employees other than the business owner(s) and their spouse(s). The general 401(k) plan gives employees an incentive to save for retirement by allowing them to designate funds as 401(k) funds and thus not have to pay taxes on them until the employee reaches retirement age. In this plan, both the employee and his/her employer may make contributions to the plan. The Solo 401(k) is unique because it only covers the business owner(s) and their spouse(s), thus, not subjecting the 401(k) plan to the complex ERISA (Employee Retirement Income Security Act of 1974) rules, which sets minimum standards for employer pension plans with non-owner employees. Self-employed workers who qualify for the Solo 401(k) can receive the same tax benefits as in a general 401(k) plan, but without the employer being subject to the complexities of ERISA.
The Swiss pension system rests on three pillars:
This article is intended to give an overview of pensions in the Netherlands.