The Advantages and Disadvantages of Defined Benefits Pension Plans
A defined benefits pension plan is a type of retirement savings plan in which the employer promises to pay the employee a predetermined amount of money upon retirement.
These plans are commonly offered by government agencies and large corporations in Canada.
Here are a few advantages of defined benefits pension plans:
Guaranteed income. One of the main advantages of a defined benefits pension plan is the guaranteed income it provides upon retirement. This can be especially appealing to those who are risk-averse and prefer a more predictable stream of income.
Professional management. Another advantage of defined benefits pension plans is that the investment decisions are typically made by professional money managers. This can be beneficial for those who lack the time or expertise to manage their own investments.
Potential for higher benefits. Defined benefits pension plans may also offer higher benefits than other types of retirement savings plans, such as defined contribution plans. This can be especially appealing for those who are planning for a longer retirement.
However, there are also a few potential disadvantages to consider:
Limited flexibility. One disadvantage of defined benefits pension plans is the lack of flexibility. Employees may not have control over how the assets in their pension plan are invested, and they may not be able to access their funds until retirement.
Dependence on employer. Another potential disadvantage is that the employee's benefits are dependent on the employer's ability to fund the pension plan. If the employer experiences financial difficulties, the employee's benefits may be at risk.
Limited portability. Defined benefits pension plans may also be less portable than other types of retirement savings plans. If an employee leaves the company before they are eligible to receive their pension, they may lose out on their benefits.
In summary, defined benefits pension plans can offer a number of advantages, including guaranteed income, professional management, and the potential for higher benefits.
However, they also have a few potential drawbacks, such as limited flexibility, dependence on the employer, and limited portability.
It's important to carefully consider the pros and cons of a defined benefits pension plan before deciding whether it's the right choice for you.