Learn More About Pension Funds

Elaine King

Sometimes retirement seems like an event that’s too far away for us to worry about. However, as part of the investment protection activities, it's important to learn about pension funds and make decisions that will make your life easier when the time comes.

This kind of investment, that operates with the contributions that you make from your monthly salary, will help you to have enough money to maintain your lifestyle when it comes the time to retire. Choosing a pension fund is a very important task, so you must know all of your options and make the most profitable decision.

How does a pension fund work?

A percentage of your salary is deducted monthly (you can check the payslip that your employer must issue). The PPS or private pension system gives you the opportunity to choose where and how to make your contributions to achieve greater profitability.

There are Pension Fund Administrators or PFA's who receive the money accumulated in a fund and invest it. This type of investment is known as a multi-fund, and each one has different characteristics and conditions that are normally associated with each worker's profile.

Types of Multi-Funds

There are currently three types of multifunds that you can choose from to make your contributions. Remember that you can change your PFA or multifund whenever you like. These are the three types of funds:

Fund 1 - Conservative
In this fund, the contributions are invested as debt instruments with lower risk, although their profitability is also lower. This type of funding is recommended when there's a great deal of uncertainty or when your retirement is close and you want to avoid surprises and losses.

Fund 1 - Moderate
For this fund, debt instruments are combined with equity instruments, which results in a balanced portfolio. This way, if there are losses in one of the instruments, there are others that will stabilize the investment, generating a balance. This fund is used by default when you begin, but you can change it at any time.

Fund 3 - Risky
This type of fund invests in equity instruments and has the potential of higher returns, but also carries higher risks. Their performance tends to fluctuate and they're recommended in stable economic scenarios or for young workers who don't have a lot to lose.

How to make a decision?
There are several factors to consider when deciding what type of pension fund best suits your possibilities and gives you the best results. One of them is evaluating your patrimony by adding all your assets and obligations. Classify the risk of your net worth and then decide where you can take more risk and for how many years you can take that risk. The type of portfolio you should invest in will depend on that. Historical behavior will help you sometimes, but you must remember that historical performance does not guarantee future performance. It's also important to take the cost into account, since each PFA will charge you a service charge for the management of your money and the administrative costs that this generates. The contribution corresponds to 10% of your gross salary and the service charge is calculated based on that. On the other hand, between 1 and 2% of your fund will be used as an insurance premium to cover you and your family in case of an unexpected event that would cause your inability to perform your functions or death. In this case, you or your family are entitled to a pension payment. Check out the type of insurance that each institution offers and take that into account before choosing.

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Elaine King - Family and Money Matters™ 2021