Defined Benefit Scheme

What You Need To Know About The Defined Benefit Scheme

A Defined Pension Scheme is a pension scheme which defines the benefits to be paid to the members on retirement. Employer Defined Benefit Schemes are traditional company schemes in which you accrue pension benefits according to the length of service. The Defined Pension you receive will be based upon your final salary, or the average of your last few years of earnings and the length of your service within the company. The risk of the Final Salary Defined Benefit Scheme will lie with the employer in their commitment to deliver you with a pension at retirement, regardless on their return on their investment.

Types Of Defined Benefit Schemes

There are two main types of Defined Benefit Schemes:

• Contributory Defined Benefit Scheme - The employee makes pre-tax contributions and many employers match this contribution which can be extremely beneficial to the employee.
• Non-Contributory Defined Benefit Scheme - The employer makes pension contributions on the employee's behalf and the employee does not contribute.

The Benefits Of Defined benefit Schemes

Defined Benefit Schemes are normally considered to be extremely favourable. This is, however, subject to the employee's length of service and their final salary. The benefits of the Defined Benefit Schemes may include:

• A lump sum and an income for life.
• There may well be a number of beneficial extras, such as life insurance and a pension for your spouse if they live longer than you.
• The risk of the Final Salary Defined Benefit Scheme will lie with the employer in their commitment to deliver you with a pension at retirement, regardless on their return on their investment. The employer will have to decide on how much to invest and where to put it. They also have to monitor the progress of the investments. If it looks like there isn't enough in the fund for all the future pension commitments then the rate that you and your employer contribute each month can be raised well in advance. This type of pension is becoming less popular as many employers do not want to take on this risk.
• There will be a set rate of contributions which will be deducted from your salary before tax is deducted each month.

Some Defined Benefit Scheme Top-Tips

• Ensure that you thoroughly establish how your salary is defined. In many Defined Pension Schemes special pay such as bonuses and overtime are not counted as being part of your salary.
• Establish what the accrual rate for your scheme is.
• Consider whether you will be financial able to make additional contributions within the Defined Benefit Scheme.