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What is a Pension Fund?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 25 November 2016
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    Conjecture Corporation
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A pension fund is a type of retirement program that is structured to allow contributions received into the plan to be invested on behalf of the account holder. Over time, the funds help to create a pool of resources that can be drawn upon after retirement, usually in a series of monthly payments. While pension funds are normally offered through an employer, it is also possible for self-employed individuals to establish a pension fund scheme and create a degree of financial security for his or her later years.

While laws governing the establishment and operation of pension fund plans vary from one nation to the next, there are a few basics that tend to apply everywhere. First, funds are contributed to the plan from the earnings of the employee. This is normally managed with the use of a payroll deduction. The amount withheld each pay period may be a fixed amount, or be a percentage of the gross wages or salary of the employee. Many employers also have some sort of matching contribution that is contributed to the pension fund for each employee, often on an annual basis.

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The pension fund may be established as an open or a closed retirement plan. With an open fund, the plan places no restrictions on which employees may participate, other than any restrictions that may be required by local laws. In this scenario, managers, officers, and factory workers employed with the same firm may all participate in the same pension plan. With a closed plan, there are restrictions on who may participate. With all types of plans, there are usually limits on the amount of contributions that can be made by the employee on an annual basis, as well as limitations on employer contributions during the same period.

In some countries, a pension fund that is managed by the national government is made available to all citizens. Participation in the program may be mandatory, in that contributions must be withheld from wages and salaries, and forwarded to the country’s revenue agency on an ongoing basis. The employee may choose to also take advantage of any other pension plan that is offered outside the government plan, effectively creating two sources of income for the retirement years.

For many people, the pension fund represents the main pool of resources that are set aside for use during the retirement years. Others may choose to augment that income pool with other assets, such as real estate, investment in stocks or bonds, or collecting art and other objects that can be sold at a profit when and as needed. In all situations, taking steps to prepare for retirement is essential if the individual wishes to maintain an equitable quality of living once he or she is no longer active in the work force. For many, the foundation of that type of financial security begins with the establishment of a pension fund.

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