Pension plans
vary greatly in terms of the benefits that they provide and their structure.
The two most common types of pension plans are the defined contribution or the
money purchase plan and the defined benefit plan. Sometimes these two plans are
combined and the combination is thus known as hybrid plans or combination
plans.
Designed defined benefit plans
The defined benefit plan for self employedare
designed to provide a fixed amount of pension benefit after you retire from
your job based on some formula. This formula, which his used to, calculate the
pension benefits, depends upon various factors like the amount that you pay and
years of your service. It is described in the documents of the pension plans
that are provided to members. Members who avail this type of pension plans are
advised annually about the pension benefit that they have earned up to that
point.
The company mainly uses three types of formulae to determine
the pension benefits of the member.
Flat benefit formulae- The annual pension benefits that you will
get will be a fixed amount per year of your service. For example 50$ per month
per year of service.
Final or best average earning formula- In this formula, the
pension will adjust as per your wages. For each year of your service, this
formula provides a specified percentage of your final earnings or average of
your earnings over a specified period. For example, 2% of your average earnings
over the best 6 years of earnings X year of service.
Career average-earning formula- In this, the annual pension
benefit, which you will receive, is a fixed percentage of your annual earnings.
For example-1.5% of your annual earnings.
This is also known as money purchase plan. In this, a fixed
amount is regularly contributed for you. The money is placed by your name in an
investment account. After you retire, these investments along with interest are
used to buy pension. However, in this you will not have any idea about the
amount of pension until you retire.
Some plans of this category allow employees to make their
own investment choices. Whereas other require that the investments decision
should be left with board of trustees or other senior people in the
organization.
Ultimately, the Pension Deductionsbenefit that you are
going to receive after your retirement will depend upon the contributions made
on your behalf or by you. It will also depend upon the return on the
investments on the contributions made by you and the annuity factor.
Both defined contribution and the defined benefit plan are
registered pension plans, but apart from them there are few pension plans that
are not registered, these are Deferred profit
sharing plan (DPSP), Employee stock purchase plan (ESPP), Individual
pension plan (IPP). These do not generally follow the same rule that registered
pension plans follows. These plans heavily depend upon the performance of the
company in which you are working. Thus, it will be difficult for you to
estimate the amount that you are going to receive post retirement.
To read more visit www.pensiondeductions.com
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