are contracts through which savings related to pensions are chaneled. Their main characteristics are that they are contracted privately and voluntarily (using individual savings) and they are supplementary in nature, since in no case do they replace state pensions. They work like a piggy bank in which a certain amount of capital is accumulated plus the interest it generates.
Pension plans must be attached to a pension fund. A pension fund is an independent asset that accumulates the contributions of the people who have contracted a pension plan, who are known as participants. This means that if the company that is managing a pension fund goes bankrupt, the individuals would be guaranteed the value of their investments.
Pension plans typically cover the contingencies of retirement, disability, death and dependency.
Advantages and disadvantages
Pension plans make it possible to build up an income that will be greater the earlier you start contributing. There are maximum annual contribution limits to be taken into account that depend on the legislation of each country. Once the contingency occurs, for example, retirement, this contribution will be paid in addition to the state pension. They also offer a significant tax deduction, which also depends on the individual country.
On the other hand, it should be noted that the management of the investments associated with pension plans is carried out by professionals who are experts in the field and fully dedicated to this work. In addition, the financial institutions that promote the plan usually offer a guarantee that they will provide a certain value of their established entitlement, in other words, of the economic rights that the participants have as a result of the contributions made and the financial regime provided for in the plan.
The main disadvantage is their lack of liquidity, since in most cases the amount can only be received at the time of retirement, death, disability or dependency. In some countries there are exceptions to this, for example in Spain, all or part of the savings can be recovered when a serious illness or unemployment occurs, although the market value of the investments must be taken into account.
Pension plans, in most cases, do not guarantee any type of return; this will depend on the investments into which the participants’ contributions are invested.
There are three parties involved in pension plans:
- Promotor: is any company, society, entity, etc. that creates a pension plan and subsequently develops it.
- Participant: the individual in whose interest the plan is created, i.e. the person whose retirement, disability, death or dependency is to be protected.
- Beneficiaries: these are the individuals who are entitled to receive the benefits, who may or may not be the same as the participants.
- Depending on the people involved, there are three types of system:
- Individual system: these are constituted by financial institutions and can be contracted by any natural person. They are considered to be part of the supplementary pension system.
- Employment system: these are promoted by companies for their employees and are part of the corporate supplementary pension system.
- Associated system: promoted by associations or unions for their associates or members.
- By virtue of the obligations stipulated, they can be:
- Defined contribution: the amount of the contribution to the pension plan is determined in the contract and the benefit is calculated on the basis of the savings generated. Defined contribution occupational pension plans can be subdivided into contributory and non-contributory, depending on whether or not they require a contribution from the participant in order for the promoter to make the corresponding contribution.
- Defined benefit: the amount of the benefits is predetermined, although in this case the contributions to be made are not known in advance.
- Mixed: these combine a defined contribution and a defined benefit.
Individual plans can only be defined contribution plans.
- Depending on the assets in which each plan invests, they can be: variable return, mixed variable return, mixed fixed return, long term fixed return, short term fixed return and guaranteed.