Pay-As-You-Go versus Fully Funded Pensions

Owning a pension can be very beneficial to you as you near retirement. Preparing for retirement will allow you to live a comfortable lifestyle once you stop working. Failing to plan has caused many people to pick up a second career after retirement. If the company that you work for offers a pension plan, it will likely come in one of two formats. You will either have access to a pay-as-you-go pension or a fully funded pension. While both can be beneficial, here are a few things to help you understand the difference.

Pay-As-You-Go

With a pay-as-you-go pension plan, you are in control of how successful it is. This type of account is similar to a 401k plan offered by an employer. With this type of pension, you decide how much you want to contribute. You can contribute different amounts as you see fit. You can take out so much money per paycheck or you can put in a lump sum if you have some extra cash laying around.

With the funds that you deposit into the account, you will be able to choose from a few different options to invest in. You get to pick where your money goes. Therefore, you are responsible for how the pension grows over time. You can choose riskier investments if you would like to and possibly get a higher return. You are also free to choose safer investments and get a steady return instead.

Once you reach retirement age, you have a few options to get the money. First of all, you could choose to get the distribution in a lump sum. You will receive one large check for the entire amount of your pension account.

Another option is to purchase a lifetime annuity with the money. This will result in you receiving a monthly payment for the rest of your life. If you would prefer a monthly income, this is the best way to go. You can also combine the two options and take a lump sum payment with a smaller monthly annuity.

Fully Funded Pensions

With a fully funded pension, the process works a little differently. During your working years, you do not pay anything into the pension plan. The company fully funds the pension plan for all of the workers. Therefore, nothing is deducted out of your paycheck and you do not have to make periodic deposits.

Once the money is in the account, you do not have to manage it. You do not choose where the investments go for your particular pension. A pension fund manager takes care of the entire account for everyone. They invest it as they see fit and to meet the requirements of the pension fund.

You have several options when you near retirement. They will have predetermined payouts depending on how many years of service you give them. You choose how long you want to work and your pension payout will be adjusted accordingly. Therefore, you are receiving a guaranteed payment depending on the length of time that you were with the company.

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