How do retirement plans work?

If you want a good income when you retire, it's important that you look over all of the pension options that are available to you, and one of these choices are retirement plans. Read on to find out how they work and to understand whether or not they're a good option for you.

What are they?

Retirement plans are offered by a large number of companies. Much like a normal pension, they allow those who invest in them to place their earnings into a pot, which is then invested in order to facilitate the growth of the fund. The company operating the plan will usually make money from these investments as well through commission or charges. 

Plans such as these are often geared towards ensuring that those who pay in are exposed to as little tax as possible, ensuring a larger pot when they retire. At this point, the pot can be used to buy an annuity with either the provider of the plan or another company, or be put in another pension, to help it to grow further.

You can choose to invest in a plan of this sort on your own, or you may be automatically enrolled in one through your employer. Regarding the latter, you will still be able to control your plan's options.

What do they offer?

Retirement plans come with a very large variety of options to choose from, however, there are similarities seen across the marketplace.

Investment options

Most plans will offer a choice between personal pension and self-invested personal pension (Sipp) investment options, for example. With the former, you can choose a pre-set investment portfolio that is managed by the company operating the plan. Risk levels may depend on the plan itself, reduce as you grow closer to retirement, or be set by you.

You might also be able to choose from a variety of investment portfolios offered by the company, or self-invest your pension pot, thereby allowing your funds to be used to purchase assets such as shares, bonds, gilts and so on, that aren't otherwise offered by the company with which you have the plan.

Advisory services

Some companies will also offer advisory services, providing you with an insight into which investments to pick and when to sell them – a potentially important benefit, especially if you choose to self-invest.

Retirement plan caveats

Retirement plans may limit the number of funds you can invest in, or charge you for a variety of actions – commission on payments you put into the plan, transfer charges or fees for using any advisory services provided by the company.

As with any pension plan, you can transfer the funds from a retirement plan to another at no cost to you, giving you flexibility and peace of mind.

Retirement plans are one of the many pension options open to people saving for later life. As with any investment, make sure to do you research and understand all of the options open to you to ensure you get the best financial return available.

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