Index Personal Pension Plans
How does an Index Pension differ from a Fixed Pension?
Remember that Fixed Pensions are a step above a CD? Index Pensions are a step above Fixed Pensions if you like the stock market world because instead of CD type returns, Index Pensions allow a personal pension to greatly increase in value throughout the entire accumulation phase with the potentially higher returns of a market driven investment while at the same time never losing any of the existing pension value if the markets should ever go down.
How can an Index Pension greatly increase in value?
The rate of annual increases in the value of the Index Pension is linked to an investment index such as the S&P 500 or Dow Jones or NASDAQ indices for example. The annual index increase allows the pension to earn much higher accumulation amounts based on the performance of the underlying index. The pension value increases if the underlying index rises during the annual accumulation phase.
How much of an annual increase could be expected?
In a rising market the pension typically receives anywhere from 50 to 90 percent of the index gain although 70 percent is a usual benchmark return. In other words, if the index should rise 10 percent during the year then 70 percent of the index gain would be added to the accumulated value of the pension amount. That gain is permanently locked in and never subjected to any future market loss.
What if the underlying index should go down during the year?
A highly valued feature of this pension is that in the event the index should decline in any annual period then the pension value is not affected and will not lose any of its existing value and in fact will still guarantee a minimum return for that year.
How can the pension value increase if the index loses value?
The guaranteed minimum return is in exchange for the pension not receiving all of the rise in the underlying index value in good market years as stated above in addition to holding the pension until the end of the accumulation phase which typically lasts anywhere from 7 to 15 years depending on the time frame chosen when the pension is initially selected.
Are there any drawbacks with an Index Pension?
Most Index Pensions have surrender charges similar to those of a bank issued CD. Just like a CD, these charges may be assessed during the early years of the contract if the pension owner surrenders the pension prior to the agreed upon accumulation term. In addition, certain withdrawals made prior to age 59½ may be subject to a 10 percent federal income tax penalty.
Is the pension value in an Index Pension guaranteed?
Yes. Just like a federally insured and guaranteed CD, Index Pensions maintain equivalent insured and guaranteed state specific amounts. 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 Index 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.
Why would I want to add an Index Pension to my retirement portfolio?
If you don’t want to lose any value in your personal pension but still want to benefit from the higher potential returns of stock market investing then this would be an excellent type of pension to consider especially for anyone under the age of 65 as it’s an excellent vehicle for those wishing to maintain exposure in the markets without fearing any type of loss to their existing pension value.
