The assignment will talk about the best pension plan that to be considered by the service sector employees in such a way that it gives them the fuller benefit after the retirement and in the future. The assignment will also take into consideration the factor which will act as the deciding factor to put their superannuation contribution in either defined benefit plan or the investment choice plan. The assignment will also cover the issues related to the concept of time value and money which are most important factors in decision making process for the pension plan scheme.
Tertiary sector means the service sector of the country’s economy. The other two sectors are primary and the secondary sector. The tertiary sector only deals with the services not the end products. The services are intangible in nature in the form of advice, thoughts, accessibility and the experience. The Australian Services Roundtable has defined service as the service deliver help and care; major part is intangible in nature than the physical in nature. Australia ranks on the top in the service industry (Bhasin, 2015). The industries which comes under the service industries are teaching, nursing, hotel industry, housekeeping, health care services, professional services, management for waste services, services of investment, services of arts and entertainment etc.
The term superannuation contribution states that the planning done by the country’s government to support people to collect money for the retirement purposes. Superannuation in Australia is somewhat compulsory and it is supported by the tax benefits. The government of Australia has set up the minimum criteria for the contribution made by employees as well as from the team of superannuation fund (Sierra?García.et.al.2015). The rate of contribution has increased to almost 9%. In 2017, Australia ranked 4th in holding of pension fund asset in the world. The total asset Australia has is almost $2.50 trillion.
Defined benefit plan is the pension plan in which the employer promises to pay the certain decided payment to the pension plan and that is been calculated through the calculation from the formula. The calculation is based on the duration of the employee in the organization and the earning history of the employee (Francis.et.al.2013). In most of the private sector the defined benefit plans are completely contributed by employer. In the public sector the defined benefit plans takes the contribution from the employees. This pension plan is fully different from all other pension plans and in this employee already knows about the amount which he will be receiving at the time of retirement (Zadek.et.al.2013). And it is known by the standard formula. The defined benefit plan provides fix and prior established benefit for the employee at the time of retirement. They are often more complex and more costly to maintain as compared to the other plans. In this the contribution is made by the employer and at very few time employee makes the contribution and sometimes the voluntary contribution can also be allowed.
Investment choice plan is also the pension plan in which there is the contribution is made by the individual. In this type of the plan the employees have the freedom to recommend regarding the type of asset to be invested in the contribution (Chang.et.al.2013). There are almost four investment strategies on the investment choice plan the strategies are: the protected fund, the stable fund, trustee’s selection fund, share fund. The options available to the retired person are indexed pension: in which they provide the regular income which are payable to the person alive and if the person is dead then it is transferred to the spouse or the dependent. Single life indexed pension- it provides the employee for the higher income which is not transferable to the dependent at the time of death (Warren and Jones, 2018). Allocated pension: in this the regular income is provided and used the four strategies discussed above and it is also transferable at the time of the death of the person.
The health of the self and the partner, i.e., the lump sum money may require to pay the huge amount of bill and is the right option for the long term. The knowledge of the investment is also the main factor. The knowledge increases as the person grows older. The person should be confident and should feel secure and maintains the fund and use them at the time of the retirement (Killian and O’Regan, 2016). The living expenses are more or less fixed. It does not include the taxes and the maintenance of the house. The person should develop the retirement budget, like estimating the expenses after the retirement because after the retirement the earning phase ends. This can be made by looking at the current spending of ourselves. The retiree should create the retirement plan. The another factor is IRA and the employer sponsored plans: in this the contribution limits are to be considered because to see that the retirement plan the workplace is offering the equal amount to the employers contribution and by researching the fees and the other related options we can identify that which of the plan id better (Agrawal and Cooper, 2017). The treatment of tax also checks for choosing the retirement plan. To check the taxable retirement income the person should consider the social security benefit and the minimum distribution.
The IRA scheme people take the minimum distribution from the age of almost 70 and the person who is taking the Roth IRA doesn’t take the distribution. The factor of retirement income and the legacy in which some people over invest the money and get more money at the time of the retirement than usual requirement (Belal, 2016). There are many more variables which affect the retirement plan but the process involves more about thinking money. Roth IRA can be considered as the most effective planning tool for many reasons (Figge and Hahn, 2013). Few of them are there is no availability of RMDs, so the balance can grow tax free for lifetime. The other is the Roth is flooded with after tax money. So that the when we withdraw the money we can withdrew it tax free by us or any of our dependent’s
The term time value of money states that money has the time value and the value of the present day money is more than the future day money. With the recognition of the time value of money and the risk we can take the important decisions easily. This is the main principle of the financial decision (Windolph.et.al.2014). This concept can be applied to all the related area of the financial management and is used to determine the capital budget and valuation of the stocks and bonds. It is also said that money loses its value over time and all desire to have the money today rather than for later. There are many reasons why money loses value over period of time. The main reason is the rate of inflation which is reducing the buying capacity of the money. Receiving money in the future rather than today may integrate the risk and uncertainty concerning the recovery (Watson, 2015). The concept of time value of money is used in the financial management to include the financial impact at the time of cash flows in the decisions of the business. Money has time value for because future is always uncertain and very risky. The inflow of the cash is dependent on the creditor and the bank. The rate of inflation is also one of the reasons for time value of money, the money that the person is having today has more purchasing power than the money that we will receive in the future. People generally prefer the concept of current consumption to the future consumption.
The fundamental principle behind the concept of the time value of money is the money received in present and the worth of money ids more than what it received after some period of time. It is the important concern in making the financial decision. Many companies and the professionals use this concept in making the daily decisions. The decisions can be applied to estimate the receipt and payment of money at different point of time (Khan.et.al.2016). The principle states that the money can earn interest and can increase the value of money in mean time and spends it as the inflation in the economy will decrease the buying power of the customers of the same amount. This application can be applies to all the area of the financial management to decide the technique of the capital budgeting, valuation of stock and the valuation bonds, leasing and cost of capital (Bevis, 2013). The businesses can determine to give good to the customers such as give discount when you receive the amount immediately. It can be used while developing the new product to determine the rate of return a company is expecting while undergoing the new projects. There are two terms to take into consideration: present value and the future value.
Present value determines the worth of the future cash flow in the present. It is calculated by using the average rate of return multiplied by the number of periods. Generally the present value shows the amount of money that has to be invested in order to receive the money in the future date. This technique is used in many of the businesses so that they can estimate or decide the profits for the future (Sierra?García.et.al.2015). Determination of worth of money is not the simple one as it looks. Several factors need to be taken into consideration the factors are interest and the rate of inflation. Future value determines the amount of the worth cash flow will be requiring in future by factoring the interest rate and the capital gains over a period of time. The future value will increase as the interest is invested again. This reinvestment of the interest is known as the compound interest.
The decision making is very crucial, once made cannot be taken back. The company which is working with the employees takes many factors into consideration and they do very careful analysis of the same (Peters and Romi, 2014). There are many factors which impacts the decision making process. The factors are in the retirement time the after tax spending are required, the history of the family health, the current investment plans and the sources of income like social security benefit and the other pension plans and the generation of income from full and part time job. The plan though made should not be shaky or loosely made. The plans should be firm and strong.
In present there are many pension and the retirement plans. The different plans are: old age security- in this in Australia it is the largest pension plan program, which provides the monthly pension which starts from the age of 65. The other plan is guaranteed income supplements which are the addition to the monthly benefit to the people with the low income from the age group of 60 to 65. It is for the dependents or the spouse. When we take the consideration of time value of money in choosing the pension plan, the plan that we will choose will give us the full and the extra benefit in investment and the return will also be full (Maas.et.al.2016). The plan that is chosen is depending upon the present and the future value of investment and the pension. The fair value in the consideration is calculated by taking the present value of cash flows and the future value of present cash which is with us.
Conclusion
The assignment concludes that the choice of the best retirement plan by the service sector employees is by looking at the best benefit derivation. It also stated the factors which lead in choosing the defined benefit plan and investment choice plan and how these factors affects the decision making process in selecting the retirement plans or the pension plans in Australia. The service sector employees have chosen the investment choice plan as it is giving them the more benefit and there is contribution made by the employers and the dependents also get benefitted by the same even after the death of the employee.
References
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Bhasin, M.L., 2015. Corporate accounting fraud: A case study of Satyam Computers Limited.
Chang, X., Hilary, G., Kang, J.K. and Zhang, W., 2013. Does accounting conservatism impede corporate innovation?. Unpublished working paper, Nanyang Technological University, INSEAD, and Chinese University of Hong Kong.
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Sierra?García, L., Zorio?Grima, A. and García?Benau, M.A., 2015. Stakeholder engagement, corporate social responsibility and integrated reporting: an exploratory study. Corporate Social Responsibility and Environmental Management, 22(5), pp.286-304.
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