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Your Future is Guaranteed with a Pension Plan

Pension plans are a crucial component of retirement strategy. They are intended to give you a reliable source of income in retirement that will enable you to keep up your costs and style of living. This has several advantages, such as tax benefits, employer contributions, and investment growth.

The tax benefits of a pension plan are among its greatest advantages. Since most pension plan contributions are tax deductible, you can lower your taxable income and save money on taxes. Its investment growth is also tax-deferred, meaning that until you begin taking withdrawals in retirement, you won't be required to pay taxes on your earnings. By doing this, you may accelerate the growth of your money and increase your retirement income.

The company contributions to a pension plan are an additional advantage. As part of their benefits package, many businesses provide pension plans, and they will make contributions to the plan on your behalf. By doing this, you can increase your retirement savings without having to make as many contributions yourself. Furthermore, some businesses provide matching contributions, which entails a percentage match of your plan contributions made by them. By doing this, you may accelerate your retirement goals and save even more money.

Retirement Financial Security

For many people, financial stability is the most important factor to consider while planning for retirement, because such a plan offers a consistent income stream during retirement, it might provide one a sense of security.

Steady Income Stream

One of the main benefits of a pension plan is that it provides a steady income stream during retirement. Unlike other retirement plans, which require you to manage your investments and withdrawals, a pension plan provides a set amount of income each month. This can help you budget and plan for your retirement expenses with more certainty.

Inflation Protection

With a defined benefit plan, your income is usually adjusted for inflation, which means that the purchasing power of your income will not be eroded over time. This is especially important since retirees typically have a fixed income and may be more vulnerable to inflation.

This can be a valuable tool for ensuring financial security in retirement. With a steady income stream and inflation protection, retirees can have peace of mind knowing that they will be able to cover their basic living expenses.

A representation of coins growing like plants
Credit: Oak Pensions

Tax Advantages

There are two main tax advantages to having a pension plan: deferred taxation and tax-free growth.

Deferred Taxation

This is one of the biggest advantages, the ability to defer taxation on contributions and investment earnings until retirement. This means that any contributions made to a pension plan are made with pre-tax Naira, reducing your taxable income for the year. As a result, you may pay less in income tax each year.

Additionally, any investment earnings are not subject to taxation until they are withdrawn during retirement. This allows your money to grow tax-free for many years, potentially resulting in a larger retirement nest egg.

Furthermore, pension plans often offer a wide range of investment options, allowing you to choose investments that align with your risk tolerance and investment goals. This can help you maximise your investment returns and grow your retirement savings even faster.

Employer Match Benefits

A plan that includes employer matching can be a valuable asset here. Not only does this type of plan provide a way to save for the future, but it also offers additional benefits that can help boost retirement savings. Let’s look at the two primary benefits of employer matching: free money and compound interest.

Free Money

One of the most significant benefits of employer matching is the free money that comes with it. Essentially, when you contribute to your pension plan, your employer will match your contribution up to a certain percentage of your salary. This means that you can effectively double your retirement savings without having to do anything extra.

For example, let's say that your employer offers a 50% match on your contributions up to 6% of your salary. If you earn N1,800,000 per year and contribute 5% (N90,000) to your pension plan, your employer will contribute an additional $N45,000 to your account. That's N45,000 of free money that you didn't have to work for.

Compound Interest

The second benefit of employer matching is compound interest. When you contribute to your pension plan, your money is invested and earns interest over time. With employer matching, you not only earn interest on your contributions but also on the employer's contributions.

This means that your retirement savings will grow faster than if you were only contributing on your own. Over time, this can make a significant difference in the amount of money you have saved for retirement.

Forced Savings Mechanism

One of the key benefits of having a pension plan is the forced savings mechanism that it provides. A portion of our income is automatically deducted and invested for our retirement. This means that we are saving for our future without having to think about it or take any action.

This forced savings mechanism is particularly beneficial for those who struggle to save money on their own. It removes the temptation to spend the money that we should be saving and ensures that we are consistently putting money away for our retirement.

In addition, the forced savings mechanism of a pension plan helps to build discipline and good financial habits. By consistently saving a portion of our income, we are training ourselves to prioritise our future financial security over immediate gratification.

Estate Planning and Beneficiaries

When it comes to estate planning, a pension plan can be a valuable tool. By designating beneficiaries, you can ensure that your loved ones are taken care of after you pass away. It's important to keep your beneficiaries up to date, especially if your circumstances change, such as getting married or divorced, having children, or losing a loved one.

One of the benefits of a pension plan is that it allows you to name a beneficiary or beneficiaries who will receive your pension benefits when you pass away. This can be a spouse, child, or any other person or organisation you choose. By naming a beneficiary, you can ensure that your pension benefits go to the person or people you want to receive them.

It's important to note that if you don't name a beneficiary, your pension benefits will be paid to your estate. This can create complications and delays, as the funds will need to go through probate before they can be distributed to your heirs. By naming a beneficiary, you can avoid probate and ensure that your loved ones receive the benefits you intended for them.

In addition to naming a beneficiary, you may also want to consider setting up a trust to receive your pension benefits. A trust can provide additional benefits, such as protecting your assets from creditors and ensuring that your beneficiaries receive the benefits in a tax-efficient manner. It's important to work with a qualified Pension Fund Administration like OAK Pensions who have been a major player in the pensions industry for years, deploying aggressive marketing strategies to capture the existing base of its promoters and also making forays into other areas of the lower pensions market.

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