A pension plan is an investment product that functions like a long-term investment instrument to supplement your state pension when you reach retirement.
As with any investment fund, you will earn more or less money depending on certain variables, such as your investor profile and the risk you are willing to assume.
Pension plans can be classified according to different variables:
Pension plans based on the promoter:
There are three types of pension plan in this category depending on who is the promoter. In other words, whether the promoter is a company, partnership, union, collective or corporation. The promoter is the entity that creates the plan and should not be confused with the subscribers or unit holders who take out the plan and make contributions to it.
Occupational pension plans:
In this case, it is the employer (company or corporation) who promotes the plan and the employees are the subscribers. The contributions are made by the company but the employees can also pay into them. As long as there is a relationship between the company and the worker, this money cannot be touched.
Individual pension plans:
These are promoted by financial institutions. The subscribers are natural persons who decide to take them out for their future retirement. This is where the pension plans offered by banks come in. In this case, it's easier to move the money or change the pension plan.
Associated pension plans:
These are perhaps the least common and refer to pension plans that are promoted by unions or a particular trade. The subscribers are the members, and only the subscribers can make contributions.
Pension plans based on the return-risk relationship:
This category is based on the type of assets in which the pension plan invests. It's important to remember that the lower the risk, the lower the return, and vice versa. These include the following:
Fixed-income pension plans:
These invest their capital in both public and private financial assets. The financial assets may be short and long-term, mainly treasury bills, bonds and debentures. The risk is lower than with other financial products and so is the return. Short-term fixed income means less than two years, whereas anything over two years is long-term fixed income.
Unit-linked pension plans:
These plans invest in equity assets, such as listed shares and ETFs. They offer higher returns than fixed-income pension plans but they carry a higher risk.
Mixed-income pension plans:
These combine equities and fixed income in the same investment, seeking to maximise the main advantages of each product.
Guaranteed pension plans:
These guarantee that the subscriber will recover the entire capital invested when the plan matures, as long as they haven't drawn down any money.
These products have a very low risk but the return is also very low.
Pension plans according to contributions and benefits:
There are three types of pension plans based on the contributions and the benefits received in return:
- Defined-contribution pension plans: Here, the subscriber undertakes to make a regular contribution. When the plan is redeemed, they get back the money invested as well as a return (which may be positive or negative) based on the investments made. Individual, occupational and associated pension plans commonly include these plans.
- Defined-benefit pension plans: In this case, when the plan matures, the subscriber is guaranteed to get back all of their contributions plus a previously agreed return. This type of pension plan only applies to occupational and associated plans.
- Mixed pension plans; These are combination of the first two types. The subscriber sets up a regular contribution and gets back a minimum return when the plan matures. Like defined-benefit plans, this type of plan only applies to the occupational and associated variety.