Rather than depending directly on individual investment returns, a defined benefit pension scheme is a specified pension payment, lump-sum on retirement or a combination thereof, promised by the employer and is predetermined by a formula based on the length of employment and salary history. This type of retirement plan has been around for many years and compared with defined contribution plans, defined benefit schemes offer a guarantee that is underpinned by the sponsoring employer. Many corporations and organisations have closed future accrual in these retirement plans as the liabilities have substantially increased in recent years due to people living longer. Many employers have now set up defined contribution plans to run alongside the defined benefit arrangement, with all new employees only being allowed access to the defined contribution or workplace pension as it has now become more commonly called.
Some of the advantages of a defined benefit arrangement are as follows:
- Employees can be granted a potentially greater retirement benefit than what they can expect to receive through other retirement schemes, especially if they live for a long period of time following retirement.
- Since a defined benefit pension scheme will be based on an employee’s age, earnings and years of service to the company, the amount of the retirement benefit is known in advance
- Defined benefit schemes offer a lifetime income stream, giving an employee the security of knowing a financial plan for retirement is in place
- Funds are usually managed by professional money managers and the pension benefits are not subject to the short-term fluctuations of the stock or bond markets as the employer absorbs and shortfall.
- Defined benefit pension schemes can also provide additional benefits to its members such as death benefits that other schemes may not offer
Investax is an independent company that aims to focus on our clients’ best interests to provide only the best possible advice to help every one of them achieve their personal and business goals. We strive to provide a clear financial direction that helps us to understand our clients’ objectives by our methodology that is tailored to each of our clients’ individual circumstances, aspirations, attitude to risk and goals. If you are considering your defined benefit options call us at 0141-226 2999.