Defined Benefit Plan

Discover the advantages of a defined benefit plan for secure retirement. Learn how it works and why it's a smart financial choice for your future.
Defined Benefit Plan
3 min
08 April 2024

Defined benefit plans, also commonly known as pensions, provide guaranteed retirement income to employees.

In the present day and age, retirement plans and pensions are essential elements to secure your future and ensure that you will be able to lead a secure and comfortable life. Contrary to what the name suggests, pension plans are usually set up much before the retirement age and are a by-product of sound financial planning and investments, like in the Bajaj Finance Fixed Deposit which offers flexible tenures to suit your needs, and the efforts put into years of employment.

Defined Benefit Plan Definition

Defined benefits plans are more widely known as pension plans. These are set up by employers for their employees and are known as defined benefits as there is a set formula for their calculation. As an employee, these benefits for you are predetermined based on myriad variables like your age, income, and cumulative experience in the organisation, among others. While there are several benefits of a defined benefit plan, one major advantage is that the retirement income is predetermined, and thus, not dependent upon factors like investment returns, market conditions, and so on. In a defined benefit plan, as it is employer-based, the responsibility of mitigating risks and investments falls upon the employer. Employers have to plan and manage investments, while the employee is guaranteed to receive a fixed pension after retirement. The pension may be disbursed as fixed monthly income or a lump-sum amount, but the benefits only kick in after an employee is relieved from the company.

When it comes to safe investments, there are not many options available to the masses. One of the most lucrative options here is to invest in the form of a Bajaj Finance Fixed Deposit, which has the highest [ICRA]AAA(Stable) and CRISIL AAA/STABLE ratings, ensuring that your deposits are secured with us. Bajaj Finance offers fixed deposit interest rate up to 8.85% per annum, and bookings can be made through the Bajaj Finserv website or application.

How are retirement benefits calculated

The benefits of a defined benefit plan are calculated as per a set formula which is mentioned in the plan documentation. This varies from one organisation to the other but there are certain central components which are always taken into account to determine the employee benefits post retirement. Two of the primary factors in this formula are an employee’s total tenure in the company and their income. Often the latter part of an employee’s tenure, where their salaries were the highest, plays an important role in the calculation of pension benefits as well. Companies can also take averages of the income in these years and use them to derive a set pension amount for the employee.

Defined benefit plan vs Defined contribution plan

Defined benefit plan definition states that the benefits under the plan must be predefined. If you are an employee who has been offered benefits under the defined benefit plan by your organisation, these benefits will be shared with you regardless of your contribution to the plan. However, you may, as an employee, be required to contribute to the plan as well. Typically, to be secured under the defined benefit plan, an employee has to work for a set number of years in an organisation. This is known as the vesting period. In case an employee departs from the organisation before the vesting period is completed, they may only be entitled to partial benefits of a defined benefit plan.

On the other hand, in a defined contribution plan, the pension benefits are dependent on an employee’s contribution to the plan. As an employee, your contribution is predetermined based on your salary. A major chunk of the retirement pension and investment plans presently fall under this category as it includes some widely known pension plans like the Employee Provident Fund (EPF), Public Provident Fund (PPF), and National Pension Scheme (NPS), among others. Employees often seek to be covered under a defined contribution plan, at the least, so that their future can be secure and they can exercise some control over the benefits they would be reaping in their sunset years.

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Defined benefit plan

Defined contribution plan

Availability

Primarily available in the organised sector

Can be availed by anyone, including people in the unorganised sector and self-employed workforce as well

Contribution

Only employers

Both employees and employers

Control

As only employers contribute to these plans, as an employee, you may have little to no control over the pension amount

As you can directly contribute towards your pension plan, even manage your contribution, you can exercise more control to secure your future

 

While falling under a defined benefit plan may seem like a guarantee of pension income, qualifying for such a plan in the first place is not the easiest. As we have learned so far, there are several prerequisites for eligibility, and it also mandates a long tenure at a single organisation. For guaranteed returns and savings, it is thus a smart idea to securely invest in fixed deposit schemes as well. If you are looking to invest your hard-earned money for a long term, with Bajaj Finance FD you can benefit from compounding returns. With the FD calculator, you can check the potential of your earnings in a flexible tenure and unlock returns of up to 8.85% per annum.

Summing up

Defined benefit plans, a.k.a. pension plans, offer employees a predetermined retirement income, ensuring financial stability during their post-employment years. These plans are established by employers, taking into account various factors such as an employee’s age, income, and length of employment. Unlike defined contribution plans where benefits hinge on employee contributions, a defined benefit plan assures a fixed pension regardless of individual inputs. However, qualifying for such plans often necessitates a lengthy tenure with an organisation. While these plans provide stability and are certainly worth striving for, investing in secure options like the Bajaj Finance Fixed Deposit can further strengthen financial security, offering guaranteed returns and flexible tenures for long-term savings. Thus, a combination of pension plans and secure investments can pave the way for a financially secure retirement.

Calculate your expected investment returns with the help of our investment calculators

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Disclaimer

As regards deposit taking activity of Bajaj Finance Ltd (BFL), the viewers may refer to the advertisement in the Indian Express (Mumbai Edition) and Loksatta (Pune Edition) furnished in the application form for soliciting public deposits or refer https://www.bajajfinserv.in/fixed-deposit-archives
The company is having a valid Certificate of Registration dated March 5, 1998 issued by the Reserve Bank of India under section 45 IA of the Reserve Bank of India Act, 1934. However, the RBI does not accept any responsibility or guarantee about the present position as to the financial soundness of the company or for the correctness of any of the statements or representations made or opinions expressed by the company and for repayment of deposits/discharge of the liabilities by the company.

For the FD calculator the actual returns may vary slightly if the Fixed Deposit tenure includes a leap year.