In my previous blog post I discussed the oldest form of pension plan—the Defined Benefit Plan (DBP).
The vast majority of employers today have moved to a Defined Contribution Pension Plan (DCP). The reason for this is that unlike a DBP, once they have made their contribution, the employer is no longer on the hook for a specific monthly retirement benefit for the employee. There is no liability to the employer to keep funding the pension plan over and above what they have agreed to contribute on your behalf.
In a Defined Contribution Plan the employer agrees to contribute to the plan (sometimes the employee has the option of also adding to it), and that money is then invested in a variety of investments—each employee choosing their own asset mix of investments. The employee will receive a monthly pension based on how well their individual plan grows. There is no guaranteed pension income in this case.
The plan is subject to pension legislation and therefore cannot be withdrawn until the employee is at least 55 years old, and is retired. This restriction also applies to the Defined Benefit Plan.
It is recommended that you ask us to help you choose the investments within your workplace Defined Contribution Pension Plan. It is important to choose the right mix of investments so that your plan grows well, without too much risk. These investments should complement your savings with us, and match your individual investor profile.