Working at an organization that offers a pension plan is one of the greatest financial advantages a Canadian can enjoy. Pension plans are designed to provide retirement income and help employees reach their retirement goals and for business owners- help retain key employees.
Pension plans can offer:
- Employer contributions
- Forced retirement savings for employee
There are 2 main types of pension plan:
- Defined Benefit Plan
- Defined Contribution Plan
Defined Benefit Plan
- Retirement income is guaranteed, contributions are not.
- The pension amount is based on a formula that includes the employee’s earnings and years of service with the employer
- Usually, contributions are made by the employee and employer
- The employer is responsible for investing the contributions to ensure there’s enough money to pay the future pensions for all plan members.
- If there’s a shortfall, the employer pays the difference.
Defined Contribution Plan
- Contributions are guaranteed, retirement income is not.
- Usually, contributions are made by the employee and employer.
- The employee is responsible for investing all contributions.
- The amount available in retirement depends on how the investment performs including total contributions.
- At retirement, the money in the account can be used to generate retirement income through purchasing an annuity or transferring the amount to a locked-in retirement income fund.
In summary, a defined benefits plan guarantees you a retirement income and a defined contribution plan guarantees contributions but not retirement income.
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