Fixed Pensions

Fixed Personal Pension Plans

What Is a Fixed Personal Pension?
A Fixed Personal Pension is a more basic type of Personal Pension and easily understood because it can be compared in certain ways to a bank issued CD (Certificate of Deposit) although it provides many advantages that a CD cannot offer.

How is a Fixed Pension different from a bank CD?
Many people keep CDs as a portion of their future retirement funds and will simply continue to roll them over until the day comes when they may wish to have access to that money. And while most CDs usually offer shorter maturity dates, one of the major advantages a Fixed Pension provides, is that in exchange for a typically longer maturity date, is the ability to have a lifetime income option which a CD cannot provide.

How do payout options compare between CDs and Fixed Pensions?

A good way to understand how payout options work is to let’s say you have a $50,000 CD and you decide to begin using it for retirement income at the rate of $1,000 each month. Without considering future accumulation earnings in this example, it is pretty straightforward that you will receive only 50 months or a little more than 4 years of retirement income. Period!

Now look at that same $50,000 if it was in a Fixed Pension instead of a CD. When you wanted to begin using the Fixed Pension for retirement income, you have the ability to receive income for the rest of your life as one of your payout options. The monthly amount you would receive would be determined by your age and other factors when you select your payout option and although it may or may not be a smaller or larger monthly amount you might receive from a CD, that is more than offset by the fact that you would receive that amount every single month for the rest of your life.

Does a Fixed Pension offer any tax advantages?
Yes. Fixed Pensions provide tax deferral on earnings while CDs don’t. You pay annual taxes on earned CD interest without being able to withdraw funds until your lock up term is over. With Fixed Pensions the earnings are tax deferred. You only pay taxes on accumulated earnings when those earnings are withdrawn.

So with Fixed Pensions the deferred tax on your interest remains within the pension allowing you higher accumulation returns by not having any taxes being paid out to state and federal tax agencies on a yearly basis. It has the benefit of achieving a higher compounding rate of return for the Fixed Pension owner.

 What about the safety of a Fixed Pension compared to a CD?
The Federal Deposit Insurance Corporation (FDIC) insures the value of CDs (up to prescribed limits) while each state has a State Guaranty Association (SGA) that insures Fixed Pensions (up to prescribed limits.) The difference between these two guarantees is that the FDIC continually collects money from member banks adding it to a fund that pays the liabilities of a failed member bank while the SGA assesses individual members their shared portion in the event a member pension plan company fails.

 Fixed Pensions and bank CDs are similar in that they are both 100% safe and secure retirement vehicles and although they both have guaranteed rates of returns based on interest rates, they also possess inherent differences as well.

What then are the differences between CDs and Fixed Pensions?

This is where CDs and Fixed Pensions begin to separate with Fixed Pensions enjoying several major advantages as previously mentioned: 

 1. Usually higher accumulation earnings

 2. Tax-Deferral benefits

 3. Liquidity provisions

Fixed Pensions typically have higher accumulation earnings. Fixed Pensions, like CDs, are hinged to interest rates. But when rates are low so are CD returns whereas Fixed Pensions have a minimum guarantee in place, usually 3% or 4%. Your pension’s future accumulation earnings will never dip below the guaranteed minimum interest rate during times of falling or low interest rates.

Fixed Pensions provide tax deferral on earnings while CDs don’t. You pay annual taxes on earned CD interest without being able to withdraw funds until your lock up term is over. With Fixed Pensions, there is also a set term, but the earnings are tax deferred. You only pay taxes on interest earned when money is withdrawn. So with Fixed Pensions the deferred tax on your interest remains within the pension earning you more and more money instead of being paid out to state and federal tax agencies on an annual basis. This also has the benefit of achieving a higher compounding rate of return for the Fixed Pension owner.

CD versus Fixed Pension liquidity. CDs do not allow you to withdraw any monies during the entire term while Fixed Pensions have provisions that allow you to typically withdraw 10% of your pension value annually plus many pensions allow you to remove the earned interest on a monthly basis. Several other provisions allow you access to all of your funds such as in the event you are hospitalized, undergoing a life-threatening illness, subjected to a permanent or extended stay in a nursing home, or other major calamities that may affect you economically. In addition, Fixed Pensions can be structured to pay out for the life of the owner, or the owner and a spouse, or over a fixed term such as five or ten years. These payment options can help provide enhanced retirement income security.

 Are there any other advantages in having a Fixed Pension?

Definitely and chief among them is the ability for a Fixed Pension to be shielded from creditors in the event of economic catastrophe and to also bypass probate in the event of your death. In other words, your Fixed Pension cannot be taken away from you by a creditor and your heirs would have immediate use of your pension value if it is going to be passed on to them. CDs can be attached by creditors and held in lengthy probate proceedings. Fixed Pensions cannot be attached and are immediately payable to your heirs upon your death.

In short, Fixed Pensions offer greatly increased flexibility to retirement funding. Although CDs will still have a role in retirement portfolios an increasing number of people are now replacing a good portion of their CD assets into Fixed Pensions. 

A side by side comparison between CDs and Fixed Pensions: