Pension Plans: Defined Benefit vs Defined Contribution
Understanding your company pension plan is crucial. Learn about Defined Benefit and Defined Contribution plans to see how they can help you achieve retirement goals.
Understanding Your Company Pension Plan
Do you have a company pension plan? Are you aware of what it truly offers? Each company pension plan is unique. By understanding the type of pension plan you have, you are one step closer to knowing how your group plan can help you achieve your retirement goals.
Defined Benefit Pension Plan (DBPP)
The income you receive at retirement under a Defined Benefit Pension Plan (DBPP) is predetermined and is usually based on a formula involving your years of service and earnings.
You receive annual statements clearly indicating the benefit on your retirement date. In these types of programs, your company manages the assets – you have no active involvement.
Defined Contribution Pension Plan (DCPP)
The income you receive at retirement under a Defined Contribution Pension Plan (DCPP) is not pre-determined. It’s based on the assets within your individual retirement plan account at the time you retire. In DCPPs, your company contributes based on a formula, which may or may not require you to make some type of matching contribution. These contributions are usually based on a fixed percentage of your salary or on a specific dollar amount. DCPPs are popular because they offer you choice and flexibility.
Under a DCPP, you determine which investments your contributions are invested in from a selection of investment options available within your plan. This allows you to create an individual portfolio suited to your own investment goals and tolerance for risk. The amount of money you have in your account at retirement is based on the amount of contributions made over the years and the earnings these investments have made.
Innovation Wealth Can Help
If you have a company pension plan, consider yourself lucky. Half of working Canadians do not have a company pension.
Typically speaking, an employee doesn’t have a choice as to whether to enroll in a Defined Benefit plan or a Defined Contribution plan. It’s usually one or the other depending on the company.
Speaking to a Wealth Advisor will help you determine how proceeds from a pension plan will contribute to your retirement income. Get started today.
Mutual funds and other securities are offered through Aviso Wealth, a division of Aviso Financial Inc.