If you are a member of a defined-benefit pension plan, you have an advantage for your financial future. Understanding that advantage will allow you to make the most of it and prepare for your retirement with greater peace of mind.
Defined-benefit pension plans have a reputation for offering many advantages to their members. However, in reality, how they work remains a mystery for many people. Let's take a look at the main advantages of this type of plan.
A predictable pension
Under a defined-contribution pension plan, the amount of your retirement pension depends on the financial health of the funds in which member contributions are invested. A defined-benefit plan, on the other hand, offers you greater predictability: it guarantees you a retirement pension of a fixed amount for your retirement.
The amount of your pension is calculated based on specific criteria, such as your salary and years of service. No surprises: you know exactly what to expect.
Favourable risk sharing
Under a defined-benefit plan, the employer generally assumes the risk: even if the plan's investments go through ups and downs, the amount of your pension will not change.
Protection from inflation
Certain defined-benefit pension plans include partial or full indexation of the pensions, resulting in an increase in your pension. This mechanism reduces the impact of inflation and helps you maintain your purchasing power over the years.
A reference point for planning your retirement
Given that your retirement income is stable and known in advance, it is easier for you to develop a long-term financial plan. That way, you can better assess your needs and make informed decisions about your other sources of savings and how to withdraw them. Having a solid retirement plan is a bit like having a good GPS: it keeps your finances on track.
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