Self-funded Pension Plans

What are self-funded pension plans?

A self-funded pension plan represents a contract between you and the insurance company. Self-funded pension plans provide three main benefits:

A way to generate income in retirement

Deferred self-funded pension plans

“Deferred” refers to tax-deferment, making this type of self-funded pension plan a similar type of investment to 401(K) plans and IRAs. The main difference is that there’s no limit to the amount of money you can contribute yearly to a self-funded pension plan. However, there are penalties for early withdrawal from these accounts, and of course they are not FDIC-sheltered investments, so there is some degree of risk involved.

For investors with several years to go until retirement, deferred self-funded pension plans provide a way to save additional funds to use in retirement years. There are two types of deferred self-funded pension plans – variable and fixed. Variable deferred self-funded pension plans offer opportunities for more growth, but carry more risk. Fixed self-funded pension plans are similar to certificates of deposit (CD’s) in that they offer a specific and guaranteed rate of return.

Income self-funded pension plans

For those who have reached their retirement years, or are very close to them, and are concerned that they might not be able to meet their monthly expenses with the savings they have, income self-funded pension plans may offer much-needed security. Income self-funded pension plans guarantee a monthly income, either for life or for a specific number of years.

Income self-funded pension plans come in three varieties, each offering a slightly different payment setup. Both immediate variable and immediate fixed start paying you right away, however the payments with immediate variable self-funded pension plans may differ on a month by month basis. Again, variable investments offer an opportunity to earn more if the market does better, but you’ll also take on additional risk that you won’t have with a fixed income self-funded pension plan.

Deferred income self-funded pension plans don’t start paying you right away, but instead defer payments for a specific length of time. Because of this, you might ultimately receive larger payments when the self-funded pension plan does begin paying, again, depending on market performance.

Why should you consider an self-funded pension plan?

All of us are looking for as much security as possible in our retirement years. We want to be able to live comfortably and also pursue our interests, whether that’s traveling or maybe a special hobby we didn’t have time for while we worked. Self-funded pension plans are a great way to give yourself some added security in your retirement.