For most people, the last thing on their minds is exploring pension options in order to plan for a comfortable retirement.
Financial managers and advisors all around the world are of the opinion that people and particularly young people should start contributing at least 12 percent of their total income towards a pension plan once they start working.
According to Cytonn Investments, there are two main types of pension options that one can invest in i.e., Pension schemes and Provident funds. The main difference between pension funds and provident funds is the mode of payment of benefits at retirement.
A Pension Scheme is a fund where you contribute to during your most productive years so that you have money to live on when you retire.
Workers in the formal sector make monthly contributions that are usually matched by their employers’ contributions on their behalf to a company staff retirement benefits scheme. A little-known fact is that you can contribute to a personal pension scheme.
Personal pension schemes are ideal for people who are self-employed, for instance, business owners, artists, artisans and people who work in the informal sector. They are also great for professionals who don’t belong to a retirement benefits scheme, like lawyers and doctors, as well as individuals whose employers do not have a pension scheme, like NGO and church workers.
The biggest advantage of a personal retirement benefits scheme is that it offers coverage for anyone who wants to save for retirement.
Provident funds rea retirement funds which are usually run by the government.
They are generally compulsory, often through taxes, and are funded by both employer and employee contributions. Governments set the rules regarding withdrawals, including minimum age and withdrawal amount.
In Kenya, for example, the National Social Security Fund was established in 1965 as a provident fund operating on a defined contribution basis to provide basic financial security benefits to Kenyans upon retirement.
In 2013, however, the National Social Security Fund (NSSF) Act was amended to establish two funds, namely, a pension fund and provident fund, to which every Kenyan with an income was to contribute a percentage of his/her gross earnings, and receive benefits out of the Funds in case of permanent disability or upon
retirement, a monthly life pension; and upon death, a benefit is to be paid to their beneficiaries.
Deciding on whether to join a pension or a provident fund should not be a difficult choice as the benefits for both are largely the same, other than the options available at retirement.
Read Also: What You Should Know Before Joining a Personal Pension Scheme