Pension funds

Pension funds may be defined as a form of institutional investment like mutual funds and hedge funds, which pools and invests funds contributed by investors to provide for their future pension income. They provide means for individuals to accumulate savings over their working life so as to finance their needs post retirement. These funds are paid either by as a lump sum or by the provision of an annuity. Pension funds are usually exempt from capital gains.

There are two types of pension plans:

1. Defined Benefit Plan: A defined pension plan promises the investor to pay a certain amount of retirement income for life irrespective of the performance of the underlying investment pool. The pension fund company is responsible for investing the contributions to ensure there is enough money to pay the future pensions. If there is a shortfall in the money needed, the company is liable to pay the difference.

2. Defined Contribution Plan: In this plan, both, the investor and his employer contribute to the plan. The amount to be received at the retirement depends on the total contribution made to the pension account and the plan’s investment performance.