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What is a defined benefit pension plan through my employer and how does it work?

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A defined benefit pension plan is a type of pension plan where the company you work for (your employer) ‘sponsors’ your retirement plan by promising a specified pension payment.

The great thing about defined-benefit pensions is that employers guarantee a very specific retirement benefit amount for each participant in the plan.

The plan is called ‘defined’ because the benefit formula is defined and known in advance. This way you can do the calculation based on their formula and know exactly how much your pension is worth and what you’ll be paid out when you retire.

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A defined-benefit pension plan is different from a Defined-Contribution Plan. You can learn about that type of plan here.

How Is A Define-Benefit Pension Plan Amount Calculated?

The amount that your defined-benefit pension plan is ‘worth’ is based on many factors such as:

  • Your salary / earnings history
  • Years of service
  • Age

Who Controls The Defined-Benefit Pension Plan?

In the case of a defined-benefit pension plan, your company is the one that takes all of the responsibility for the investment and is in charge of distributing pension payouts to the retired employee.

Risks With Defined-Benefit Pension Plans

One of the largest risks with having a defined-benefit plan that is managed by your employer is that the returns on the investment may go up or down, and it’s up to your employer to make sure that the pension fund is able to cover your defined-benefit amount when you retire.

This is a very important point to consider when deciding to leave your pension with your company, or take it elsewhere. Is your company in a stable industry? Is your company financially strong? Do you foresee your company potentially going bankrupt in the next 10, 20, or 30+ years?

Example: Sears Canada’s Pension Fund was short $133 million, according to court documents, and 18,000 retirees had their pensions cut by 20 per cent after the retailer folded and left behind an underfunded pension plan. This resulted in a lawsuit.

You can minimize this risk by moving your defined-benefit pension plan to a secure financial institution via a copy-cat annuity.

Defined-Benefit Pension Plan Surplus Cash

Over time, depending on how the financial market and economy is doing, your company’s defined-benefit pension plan may face deficits or surpluses between the money currently in the plan and the total amount of their pension obligations. These surpluses can be of great benefit to you if you decide to move your pension via copy-cat annuity to a financial institution because it could provide you with ‘surplus cash‘ which is bonus cash given to you on top of your pension’s commuted value.

Ask your financial advisor or a retirement pension expert details about how you could receive surplus cash on your pension payout.

We can assess your commuted value and let you know about the opportunity of potential surplus cash. Call us at 1-888-554-6661.

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