Are Pensions As Reliable As We Are Made To Think?
Not much has been said about the reliability of pension schemes in helping you secure your financial future. We’ll first get down to the basics of defining a pension and pension fund, and how it works.
A pension can simply be defined as a fund or savings towards retirement. It serves as income during the years where you are no longer formally employed and is usually paid out in instalments to the pensioner or to the pensioner’s beneficiaries in case of death. Investopedia defines a pension plan as “A retirement plan that requires an employer to make contributions to a pool of funds set aside for a worker’s future benefit. The pool of funds is invested on the employee’s behalf, and the earnings on the investments generate income to the worker upon retirement.
The two types of pension schemes available in Zambia are government and occupational schemes. Government pension is statutory, and all employers are required to remit contributions on behalf of their employees. Under this umbrella we find, NAPSA, Workers Compensation Fund Control Board among other.
Pension schemes are typically designed in one of three ways;
- defined benefit scheme (DB)
- defined contribution (DC)
- or a mix of the two.
As can be deduced from the names, in a defined benefit scheme, a predetermined formula is used to determine the payable benefits. However, in a defined contribution scheme, the payments are not certain as your contributions are predetermined. It all depends on how much one has accumulated over time. The last one is a combination of the two.
Pension schemes serve as a social security measure in ensuring that you or your loved ones have something to fall back in case of any eventualities such as loss of employment due to retirement, injury or death. Think of it a form of insurance for a rainy day. The only difference is that the payments are dolled out as monthly instalments, providing you with a set income.
Most companies have private pension schemes, which will fall under occupational schemes, that offer you sizeable returns on your contributions. Your employer matches your contributions towards the fund, and it is then invested in various instruments such as fixed deposits, property, corporate bonds, government bonds among others. The investment yields are good enough to ensure the beneficiaries of the plan retire with a reasonably good pension, enough to help launch a new chapter in their golden years.
People in pensionable employment have their plans calculated according to the number of years they have served, the level of seniority in the company and age and your annual compensation. Once signed on, contributions can be made by way of automatic salary deduction every month. Most fund managers take care to only invest in profitable and secure instruments to safeguard their clients’ interests, so you can rest assured that your pension nest egg is safe.
Having a pension fund you can contribute to definitely takes the hassle out of trying to figure things out for yourself and is sure way to secure your financial future in especially unpredictable economic times.