The functioning of the pension system is carried out through three phases. The first phase refers to the payment of contributions or premiums of participants, the second phase involves the accumulation of assets, a the third payout of pension benefits. In most countries of the world, pension benefits can be accomplished in three ways: through pension insurance under the social insurance, within the pension insurance financed by employers and throw individual pension insurance. The main forms of pension benefit payments are: single payment, i.e. lump-sum, programmed withdrawal, which includes fixed or variable periodic payments, that are generally calculated by dividing the accumulated assets with a predefined fixed or expected number of years of life of the retiree and annuity payments via traditional life annuities, which implies current payments until the insurance beneficiary death.
Lump sum payments offer a relatively high level of flexibility and liquidity to beneficiaries, but also run the risk that the entire accumulation of pension assets will be fully depleted while the user is still alive. In the case of annuity payment of a pension benefit, on the other hand, longevity risk is transferred to the pension plan organizer. However, the beneficiaries of the pension insurance may lose a potential opportunity for a more profitable investment and financing of unforeseen needs after retirement.
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