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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
US_196-197_OV_Pensions.indd 197 13/10/2016 16:21