What are the kinds of pension plans?

In the society we live in, most of us go to work in some form or another to get money to live on. As we get older, we amass a lot of work experience. As we grow older, it becomes apparent that there will come a time when we will have to retire. To retire, we have to have a scheme that will allow us to live comfortably during this period.


There are a number of ways to do this. Some save their whole life so that they can live off their savings when they are no longer working. Others have a plan in place while they are working so that that plan pays them each month that they are in retirement. They call these plans pension plans.


A description of various pension plans that exist


The first is called a Designed Benefit Pension Plan. ÒThese plans are constructed in such a way that they provide a fixed amount of benefit after you retire. These are usually based on a formula that is used to calculate your pension benefits.


Under this plan, the company uses three types of formula for determining benefits. There is a flat benefit formula. This means you get a fixed amount per year of your service. The next formula is the best earning average. This simply means your pension will adjust according to what you have earned over a certain period. As an example, it might figure 3% of your average earnings over a 7-year period. Finally, you have the career average-earning formula. You will receive a fixed percentage of your annual earnings.

 Defined Contribution Pension Plans are another kind of pension plan. Here, a standard amount is paid into an investment account every month. On retirement, a lump sum is received but the amount received will previously have not been known. The amount varies with the amount your scheme is supplemented by an external source. The sum of interest you have earned for your interest too will influence this. Certain pensions permit you to control much of that happens whereas others give a board of trustees this responsibility.


The two schemes described above are the only 2 that are registered. Other pension schemes, for example deferred profit sharing and individual pension plans exist but the amount earned will vary with how well your company is doing.