Defined Benefits And Defined Contribution

Defined Benefits And Defined Contribution

These are two major ways in which retirement benefits are received. The nature of the benefits will also impact the way in which the planning process is conducted. The benefits at the time of retirement can come either through defined benefits or the route of defined contributions. Each method has its own characteristics and hence has to be understood and dealt with in their own manner.

It is necessary that one is clear about the various benefits and the heads they fall under because this will determine their features. Depending on the nature of these routes different kinds of amounts will be available for the individual and due to this the details of this area has to be carefully looked at.

The name of the plan suggests its main features. Defined benefit plans are those where the benefit provided to an individual after retirement is known. This means that the route for calculating the benefit is clearly defined at the starting point itself. Any person who becomes eligible for the benefit will be able to make the calculations and arrive at the figure.

These plans are beneficial because here the person knows the exact calculation based upon which the amount will be received. It is the duty of the employer to pay out the required sum at the appropriate time. The onus thus shifts from the receiver to the provider of the benefit. Employees thus would prefer to invest in such plans because they provide them assurance about the amount that they will be receiving at the time of retirement.

Defined contribution is another method in implementation in this area. The features of this route are different from what the defined benefit method seeks to give. This method is finding increasing acceptance across the world by various companies as well as governments.