In the backdrop of collapsing global financial behemoths, a good question that a smart new employee may ask a pension fund marketing executive is this one: What chances do pension funds have for surviving the financial meltdown? But that should not floor the executive.
There are several reasons why retirement funds should not suffer serious loss in business due to the economic crisis. In fact, it should attract more business. The functional procedure of a majority of such funds involves active customer participation in decision making. Also, in the long run, the present stock market bear run should not cause many worries either.
An Overview Of The Functioning Of Pension Funds
Nowadays, the most sought-after category of retirement plan is the defined contribution scheme. There are various plans that come under this category. In almost all the plans, basically what the customer does is invest a certain amount of money in the fund. This money will be deposited in various investment channels.
For example, some part of the money will be deposited in government securities, bonds, and debentures. This mode is very stable and secure. In fact, based on the present interest rates and the amount of contribution, one can easily predict the amount of retirement benefit. But compared to the other modes of investment, the returns of this scheme is low. That is the price you pay for security.
Pension funds deposit money in mutual funds too. Probably in the last one year, the growth has been negative due to the stock market crash. But if you take a long-term view, mutual funds have traditionally provided better value for money than bonds and debentures.
Another investment option for retirement funds is stock markets. As most people know, stock markets generally provide high returns. But the risk of investing in individual stocks is one of the highest among all forms of investment.
The customers can specify which of the options they would like to utilize for investing their money. One can even specify a proportion of the deposited amount that is to be invested in each of these options. So, if people find stock markets falling, they can opt for more secure mode of investment.
One can withdraw the accumulated sum at any stage. The amount will be taxable for most of the plans at the time of withdrawal. For withdrawing before a specified date, one has to pay 10% extra tax. One can also opt for the monthly withdrawal of certain amount, almost like a monthly pension. In that case, the accumulated sum will be deposited in a secure investment mode, and the customer will be given the monthly interest.
The total amount can be withdrawn by the customer, as and when he or she prefers. In the unfortunate circumstance of the customer passing away before availing the money, the nominee will get the total amount.