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A direct benefit pension plan, commonly known as a pension plan or qualified benefit plan, is considered the most lucrative plan for employees. It is majorly due to the several benefits a DB scheme has to offer to them. It includes guaranteed retirement benefits and financial security.
The employers mostly fund DB plans, and the pension payout depends on a fixed formula considering salary, age, and the retention period of the employee with the company.
However, in the era of defined contribution plans such as 401(k)s, DB schemes are becoming a less and less common choice. Despite this, many still consider it the most certain and secure pension plan.
Also, we have curated the different ways in which a DB scheme can support you and your family post-retirement to help you make an informed decision.
What is a direct benefit pension plan?
The defined benefit plan is an employer-sponsored payment plan. It can be availed in a lump sum, periodical manner, or both. As its name suggests, the pension plan is defined in advance depending on the employee’s earnings, age, and tenure and not only on the investment returns.
In most DB schemes, the employer solely makes the funding for the program. However, in some instances, employees have to make some contributions. In addition, some strict laws were made to make transfers from the DB scheme to a private pension plan more flexible.
For compensating members who wish to transfer their rights and value from the DB scheme to private pension plans, a cash value, known as enhanced transfer value, is offered. Often these Defined Benefit transfer values range from 20 to 30 times your Defined benefit plan.
Defined benefit pension plan payment options
When collecting your pension money, an employee can either receive the money in a lump sum or an annuity (regular payment for the entire life).
However, it isn’t easy to choose the right payment options from the two, especially as an annuity can be structured in several ways:
Single life payment: in this payment plan, you will receive pension money in the form of a monthly payment for your entire life. However, when you die, your beneficiaries wouldn’t receive any further payments.
Single life with term certain: In this payment plan, you will receive your pension money as a monthly income. Also, if you die before the specified period in your plan, your beneficiaries continue to receive the monthly payments for the preset number of years.
50% joint and survivor: when the employee dies, their surviving spouse gets the pension money in the form of monthly payments for the rest of their life. However, it is generally equal to 50% of your original annuity.
100% joint and survivor: when the employee dies, their surviving spouse will get the pension money in the form of monthly payments for the rest of their life. Also, this money will be equal to 100% of your original annuity.
If you are in good health and expect to live a longer life, annuity payments are your best policy. However, if you experience poor health and expect a short retirement, receiving a lump sum is the right decision.
5 ways DB plan supports you and your family post-retirement
The defined-benefit pension plan can support you and your family in several ways, as mentioned below:
Fixed payout: You will receive a fixed payout, which isn’t based only on the investment returns. Instead, it depends on the previously agreed formula determining the age, tenure, and earnings.
Less risky plan: The investment risk is only on the employer and not on the employee. Even the employee doesn’t have to make any contributions, so they have no cost.
Improves employee retention: The employee takes a vested interest in the company. As a result, they will likely stay with the same company for an extended period, making them eligible to receive the maximum benefits.
Potential for spousal support: A spouse will continue receiving the guaranteed payments even after the employee’s death.
Payment isn’t affected by market fluctuations: Irrespective of the underlying payments, the benefit pension payments remain the same and unaffected.
The DB pension plan is the right fit for you if you don’t want to invest in any private pension plans yet wish to receive definite pension money. Undoubtedly, a DB scheme can benefit you and your family in several ways post-retirement.
Also, you can consult an expert to make a more informed decision about your financial situation and ambitions.