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Financial Dictionary - Retirement plans

Retirement plans

retirement plans are a form of life insurance managed by an insurance company and largely geared towards savings. 

The person who takes out the plan acquires the right to receive a certain amount of money upon retirement (i.e. at plan maturity), or earlier if he/she becomes disabled or dies before retiring. Retirement plans are managed by insurance companies.

These retirement plans grow as the holder makes regular or ad-hoc contributions.

They are much like premium payments. in the sense that the total capital contributed by the insured will determine the amount they receive upon the occurrence of any of the contingencies covered by the policy.

When the times comes to cash in the plan and receive the capital, the holder will receive the insured benefit together with the interest earned; and they may do so in a number of ways: in the form of a lump sum, an annuity for life, or a temporary annuity to be received over a certain period of time.   

Retirement plans and pension plans

Although the two are often spoken of being as synonymous and certainly as serving a common purpose (saving to top up the state pension), there are a few notable differences:

The type of product. A retirement plan is a form of insurance, while a pension plan is an investment product. 

How they are managed. Retirement plans are managed by insurance companies, while pension plans are managed through financial institutions.  

How the capital is redeemed. A retirement plan can be surrendered at any time, in accordance with the terms and conditions agreed upon in the contract. And if any of these conditions are not met, the insurance company may apply penalties. 

Meanwhile, a pension plan can only be cashed in when certain contingencies are met: retirement, incapacity for work, unemployment or serious illness. Proof must be provided of any such situation in order to cash in a pension plan.  

Taxation. A retirement plan does not offer any tax relief on the contributions you make. Rather, tax must be paid on the interest generated, although the tax treatment is very attractive upon redemption. Conversely, pension plans do offer tax relief when filing your income tax return, though always depending on the amount paid into the plan.  

Investor profile and returns. 

A retirement plan is a more conservative product, offering lower returns, but which are known from the start and guaranteed. A pension plan, meanwhile, carries a higher risk, but also offers a higher potential return. The financial markets in which pension plans invest carry varying levels of risk, depending on the type of plan.


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