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How Do Defined Benefit Pensions Work in Ireland?
If you are a working professional in Ireland who has spent a few years as a part of the workforce, this is the perfect time to consider your retirement plans. One of the most popular plans, the Defined Benefit Pension Plan, is taken up for discussion in this article as many employees are not even aware of such a plan.
Older employees should read with even greater interest as this plan helps compensate for the years that were spent without investing in any plan.
This article discusses the workings of a Defined Benefit Pension Plan and how investing in it will yield results. But before we understand how a Defined Benefit Pension Plan works, it is important to know what it is and why anyone should choose this plan specifically.
What is a Defined Benefit Pension Plan, and why should you choose it?
It is a pension plan where you know exactly how much return you will get at the maturation point of the policy. So instead of focusing on the investment amount, it enables you to focus on the targeted return amount. This will help you make a plan based on your perceived requirements post-retirement.
Another reason employees prefer this plan is that employers are bound to fund any deficits in the plan. This means that your rate of contribution to the plan is fixed, while that of your employer may vary depending on any change in the requirement of funding. This change rate might result from a change in the various factors used to calculate the monthly or annual contribution to policy.
That being said, It is important to understand defined benefit transfer values before making a decision one way or the other.
Career average earnings
In this method, the income taken into consideration is the average annual income that the employee has earned throughout his career. So basically, if you have worked for 30 years and, on average, have earned £100,000 in the past five years, considering a 1.5% return rate, you are likely to get £40,000 per year post-retirement.
To understand what you will receive every month under this method, use the below-mentioned formula or calculate here.
Monthly benefit = [years of service] x [average monthly income of all past years] x [fixed rate of return]
This method relies more heavily on investment from the employer’s side and uses a fixed amount of contribution as the basis for calculating the monthly receivable benefit that the employee shall begin to receive upon retirement. Essentially, the employer decides on the fixed investment rate; let us assume that to be £300. This value is multiplied by the years of service that the employee has undertaken. Let that be 20 years. The resulting value, which in this case is £6000, becomes the final amount that you would receive on an annual basis upon retiring.
To understand what you will receive every month under this method, use the below-mentioned formula. Monthly benefit = [years of service] x [fixed monthly contribution]
In this method, the defined benefit is calculated based on the average income received by the employee over the final five years of employment before retirement. Next, this amount is multiplied by a fixed percentage of return, anywhere between 1.5 percent to 2 percent. Finally, the product is multiplied by the total years spent by the employee under the scheme. The final value arrived upon is the total receivable annual income post-retirement.
To understand what you will receive every month under this method, use the below-mentioned formula.
Monthly benefit = [five years’ average monthly income] x [total months under scheme] x [fixed rate of return]
Irrespective of which method you choose, the defined benefit plan will, in one way or the other, give you a clear perspective on how much income you can be expecting post-retirement. That will bring greater clarity to your financial planning, which would reduce any stress or concern about living life post-retirement.
The only difference in each method is the variable you would want to be taken under consideration. For instance, if you are nearing your retirement and have worked for the employer for a long time, you would choose this method over the other two. But if you are closer to your retirement age than you are to the age at which you gained employment, you would want to choose the flat benefit plan.
No matter if you have not considered any pension plans before, you are now armed with potent details that shall help you immensely while choosing the ideal pension plan.