Tesi Johnson, Freelance ReporterA pension or superannuation scheme can be one of two types of plans: a defined contribution pension plan or a defined benefit pension plan. As an employee, it is crucial that you know which of these plans your company offers.
DEFINED CONTRIBUTION
In a defined contribution pension plan the contributions that must be made by the member and his/her sponsor are outlined at the outset, as the name suggests.
For each member, an individual account is established, holding all his contributions and those made on his behalf. These holdings are invested and the benefits are derived from the returns of the investments - which could be positive or negative.
The employee is not promised any specified benefit upon retirement.
SOME ADVANTAGES OF A DEFINED CONTRIBUTION PLAN
Easily understood by participants.
Participants can benefit from good investment returns.
SOME DISADVANTAGES
If the investments perform poorly, the individual will absorb all the loss, not the employer.
There is no way to guarantee how much the plan will ultimately give the employee upon
retiring.
It is difficult to build a sizeable fund for those who enter the plan late in life.
DEFINED BENEFIT
A defined benefit pension plan promises the participant a specific monthly benefit at retirement.
This benefit is often calculated by a formula that considers a participant's salary and/or service. In some cases, the benefit is fixed for all members, ignoring each person's salary history and duration of employment. The rules of the plan will then determine how much contributions must be made by the member and his employee in order to fund the promised benefit.
SOME ADVANTAGES OF A DEFINED BENEFIT PLAN
No matter what happens in the stock market, how long an employee lives after retirement, or whether he or she becomes disabled, your pension income is secure. These risks are borne by the employer, who must ensure that you receive the promised benefit.
Not dependent on the participant's ability to save
It is more likely that defined contribution plan, to provide retirement benefit that will be close to the final salary before retirement. That is, the benefit will more adequately 'replace' your working salary.
DISADVANTAGES OF
DEFINED BENEFIT PLANS
Difficult to understand by participant Persons who leave before retirement do not receive maximum benefit
Usually, the employer decides which plan, be it defined benefit or defined contribution, will be sponsored. You have no choice but to contribute to what is being offered, so learn the features of both possible schemes, so that you know how to exploit its merits and downplay its demerits of each.
The aim of a pension plan or scheme is to provide post-retirement benefits for its members. A pension plan may be set up by a Private Sector employer, the Government, e.g. NIS, or even sponsored by the individual. Anyone who is serious about financial planning will consider preparations for their retirement, which includes being active in a pension plan.
Tips to know about
your company's scheme:
Familiarise yourself with the documents that govern your pension plan. These include the plan rules and the trust deed to which you should have access.
Be aware of changes in legislation that govern pensions and others that may influence the state of your plan.
Keep every copy of your pension advice slip, and examine it thoroughly. Consult with a financial advisor or a pensions expert to clarify anything you don't understand.
See also the following internet sources
http://www.afscme.org/
wrkplace/pensfact.htm
www.ific.ca/eng/
Glossary/index.asp
http://www.investopedia.com/
terms/d/definedbenefitpensionplan.asp
