Defined Benefit Pension Scheme
Defined benefit pension plans are an occupational pension scheme. In the defined pension scheme, there’s a commitment for you to get paid a retirement. The retirement income or payment is based on your monthly salary and years of employment. You have the option to trade a portion of your retirement income for a lump sum once you retire.
In the defined pension scheme, you don’t have your personal funds. Instead, the plan comprises of a single massive fund from which retirement lump sums and retirement income are paid to employees after they retire. The investment performance is a huge concern for the scheme as well as for the company providing it than the employee. This is due to the fact that your benefits stay intact even if the companies financial status goes badly. This characteristic makes define benefit scheme different from a defined contribution scheme. With a defined contribution scheme, the retirement benefits will depend on how your own pension fund performs.
Defined Benefit Scheme Retirement Income
Under the defined benefit scheme, your retirement income or payout will depend on the definition of your pensionable salary and pensionable service in the company. This pension scheme will give you a fraction of a pensionable salary which includes the state pension as retirement income each year for your pensionable service, making sure that you retire at the pension schemes normal age for retirement. For example, if you are working in a company for a certain number of years and has been enrolled at the defined benefit pension scheme the whole time, you have entitlements payment. The actual calculation on entitlements is complicated, but you do not need to worry since it’s your company’s responsibility to do. In general, the higher your salary and the longer your services, the higher the retirement benefit you will get.
Defined Benefit Scheme Retirement Lump Sums
Under the revenue rules, members of a pension scheme are entitled to a Retirement Lump Sum with the amount based on their years of service and final salary. You must understand however that unless you made enough AVCs or Additional Voluntary Contributions to your pension, having a Retirement Lump Sum will reduce the retirement payment that your scheme will give you.
Some pension schemes are aimed to provides its members with a defined lump sum and retirement income at retirement. However, many of pensions schemes provide members with an income benefit which give them the option to convert a small fraction of the income to a lump sum.
Additional Voluntary Contributions (AVCs)
If you’re a defined benefit scheme member, you can have three advantages from making AVCs or Additional Voluntary Contributions into your pension. First is that you can reduce your tax payments since AVCs have benefited from the relief of income tax. Second, you can use AVCs to give you a lump sum when you reach retirement. Third, you can have the advantage you use AVCs once you made a lump sum increasing your retirement income. You also have the chance to transfer your pension income to an approved retirement fund.