Pension funds are complicated, but after reading this article, you’ll know more about them than 90% of the people around you.
A pension fund has three purposes:
Saving for retirement. No one wants to work until they die, after all.
Disability insurance. If you are permanently injured or otherwise become unable to work due to disability, your pension fund covers you.
Residual insurance. Residual insurance is a form of life insurance, and your pension fund can be used for payments of this type as well. In the event of your death before retirement, your pension fund will be used to make monthly payments to your spouse until their death, as well as to your children until they reach age 21.
Pension funds are built with a mutual guarantee mechanism. What does this mean?
When money is added to a pension fund, it is divided between two internal funds, one for insurance, and one for retirement savings. If the money being deposited in the insurance fund is not enough to cover insurance payments, then the shortfall is made up by taking a small percentage of the retirement savings. This mechanism is called actuarial balance. In some cases, this balance is negative, up to 0.3% per year, but in other cases it is positive, which means that money from the insurance fund will be moved to the retirement fund.
How much money will you get from your pension fund at retirement or when the insurance pays out?
The pension depends on how much you saved, so it is important to choose a pension fund with a high return on investment and low management fees. Insurance payouts for death or disability are tied to your salary.
To maximize your retirement savings and insurance benefits, meet with your insurance agent on a regular basis, at least once every few years, to check on your accounts.
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