Private pension

A private pension is a plan into which individuals contribute from their earnings, which then will pay them a private 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. This is similar to the regular pension. A private pension is a plan into which individuals contribute from their earnings, which then will pay them a private 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. This is similar to the regular pension. 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. 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. Nowadays, governments of developed countries have reduced the amount of money for providing pension security. As a consequence, employer-sponsored and individual products become more popular. Most of these private pensions types are connected with financial markets, which brings some risks and uncertainty. For example, it can be the time difference between the date of conclusion the contract and income stream in the future or very low rate of return if we decide to invest our money into low-risk financial instruments (savings products). Usually, 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. One of the most used private pensions is Defined Contribution Plan. Each participant has 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 individual’s account. Money in this plan cannot be withdraw without penalty until the participant’s retirement age. Another possibility in the USA is Defined Benefit Plan. This plan pays some amount of money at the time of retirement regardless the age of a participant. A monthly benefit depends on number of years worked, salary at the time of retirement and accrual rate. 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 a 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. In the UK, there are two main posibilities how to ensure additional money to the State Pension. Firstly, it is a workplace pension. In this case, the plan of savings for retirement is arranged by an employer. Part of your salary is automacially put into the pension scheme every payday. The second possibility of private retirement savings is use of a personal pension. This type of pension is arranged by insured themselves. There are two types of personal pension – the stakeholder pension where is required meeting some government limits and self-invested personal pensions where participants make decisions themselves about investment in their pension fund. 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 relieves are provided to private pension participants. In Germany, there are two private pensions plans – Riester Rente and Rürup Rente. They both follow the strategy of German government to reduce state-guaranteed pensions. This plans were designed to provide certain groups of residents with some benefits depending on their employment, economic situation and status.