Pension funds guide for beginners

A pension fund is any plan, fund, or scheme which provides retirement income and it is one of the most vital pieces of your long-term financial plan. Pension funds are pooled monetary contributions from pension plans set up by employers, unions, or other organizations to provide for their employees’ or members’ retirement benefits. They typically have large amounts of money to invest and dominate the stock markets where they invest.

The pension fund is the best way to save for your future needs, so taking an early interest in pension planning will ensure that you are able to maintain your lifestyle after retirement. Choosing the best pension fund isn’t as simple for most of the people. You could lead to extreme confusion and frustration, because there are many types of pension plans designed for different circumstances. Let’s take a look at the most important information you need to know before choosing a pension fund.

The different types of pension funds

There are many types of pension funds in the market. They have different features and each of these features affect the costs and the benefits. The major types of pension funds are:

  • Open pension funds. They support at least one pension plan with no restriction on membership. while.
  • Closed pension funds. They support only pension plans that are limited to certain employees and can be further subclassified into: single employer pension funds, multi-employer pension funds, related member pension funds and individual pension funds.

Another way to subclassified the fund pensions can be into:

  • Public pension funds. They are regulated under public sector law.
  • Private pension funds. They are regulated under private sector law.

In certain countries the distinction between public or government pension funds and private pension funds may be difficult to assess. In others, the distinction is made sharply in law, with very specific requirements for administration and investment.

Pension funds charges

Pension funds provides a fixed, preset benefit for employees upon retirement, helping workers plan their future spending. Even though investment income and capital gains are tax free, there are still fees that apply on pension funds which will affect the amount of money you have to fund your retirement. The main charges of a pension fund are:

  • Contribution fee, also known as an entry fee. They are normally expressed as a percentage of contributions (or transfers in), for example 2% of contributions.
  • Annual management charges. They are generally applied as a percentage of the fund, for example 0.5% of fund assets per annum.
  • Member fees. Many pension arrangements have a fee charge calculated as a monetary amount per member.
  • Switching charges. They are administration charges levied for switching from one type of investment to another.
  • Pensions Authority fees. Occupational pension schemes, trust RACs and PRSA providers are subject to fees payable to the Pensions Authority.
  • Withdrawal fee. It may apply when you make lump sum withdrawals from your account. A withdrawal fee is more likely to be charged on ‘nil-entry-fee’ options.
  • Adviser service fee. If you invest via a financial adviser you may be charged an adviser service fee, usually an annual percentage-based fee between 1% and 2%.

These are the main charges of a pension fund, but some institutions can charge other fees.

The eligibility to join a pension fund

Your work situation and the rules of any particular scheme or pension contract influence your eligibility to join a pension scheme or take out a Retirement Annuity Contract or Personal Retirement Savings Account. If you think to be eligible to join an occupational pension scheme, but you haven’t been provided yet with any information by your employer, you should ask your employer if there is a pension scheme, what sort of scheme it is, and whether you can join. Alternatively, you could take out a Personal Retirement Savings if you have earnings from non-pensionable employment or self-employment. It can be taken out by virtually anyone, even if you don’t currently have relevant earnings.

Benefits payable from a pension fund

The benefits payable from a pension fund could be: on retirement, on death, on leaving or on other situations.

On retirement from a private pension arrangement you will have a number of options available to you and the decisions you take at this point will have a significant bearing on your financial security and that of your dependants. The retirement options may include:

  • Taking a tax-free lump sum, subject to limits set by revenue.
  • Receiving a pension, sometimes provided by an annuity.
  • Transferring some or all of your retirement savings to an Approved Retirement Fund (ARF) or Approved Minimum Retirement Fund (AMRF).
  • Taking a taxable lump sum.
  • Providing for dependants.

Another important benefit of a pension funds the availability of benefits payable on or after the death. These benefits are very important as they are the means by which you can make financial provision for dependants and beneficiaries. Benefits may be paid in a lump sum or could be in the form of a pension payable to dependants such as your spouse, civil partner or children.

Leaving employment or changing from employment to self-employment raises issues to be considered in relation to your pension benefits, because in these situations you can take a refund of contributions in limited circumstances, and this could be a help for you and your family.

Choosing a pension fund that is right for you

Choosing the best pension fund is not a simple problem, but it’s vital for your financial healthy that you make the right choice and don’t get overwhelmed by the options. There are some basic things to consider and analyse before choosing the perfect pension fund for you. Here’s the list of what you need to do before choosing a pension fund, so you can choose the right for you:

  • Understand the different types of pension funds.
  • Understand pension fund charges.
  • Understand pension funds eligibility.
  • Understand benefits payable from a pension fund.
  • Make a personal financial plan.
  • Compare different pension funds offers.

Remember, it’s always best to have as much information as possible, before you choose a pension fund.

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