How_Money_Works_-_The_Facts_Visually_Explained

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PERSONAL FINANCE

Pensions and retirement

Pension pays

out income

Employees and employers

make monthly payments into

a fund managed by a pension

company. They may also

receive government tax relief.

Pension pays

out income

Retirement

$

$

$

State pays a set

monthly income

Some companies offer

“defined benefit” pension

plans, which guarantee a

set pension payment

determined by salary, age,

and length of employee

service. However, some

company pensions have a

funding shortfall: this may

mean that retirees will

receive less than expected.

Some workers may pay

into “defined contribution”

pensions. Poor investment

performance can also

affect pension payouts

from these funds. See

pp.200−201

WARNING

Shortfall

ACCESSING YOUR PENSION OR SOCIAL SECURITY (SS)

Pension plan

Pension

age

$ $

Different countries have different rules

about when, and how, to access pensions

or IRAs. In the US, SS can be accessed at

62, and access to an IRA begins at 59½.

There are three main options:

❯❯Option 1 Take 100% (also called a

lump-sum payout) of the pension

as cash to spend or invest. With a

lump-sum payment, the employer is

required to hold back 20% of the

payment for federal income taxes.

❯❯Option 2 Buy an annuity. This is

an insurance product that provides a

fixed amount of cash every year for

life. An annuity means the money

won’t run out, but the rate of income

will be lower.

❯❯Option 3 Use income drawdown.

This means withdrawing invested

money as and when it is needed.

There is the risk of running out of cash

if the fund performs badly.

“You can be

young without

money, but

you can’t be

old without it.”

Tennessee Williams, US playwright

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