Question

Describe the difference between a defined benefit pension fund and a defined contribution pension fund. Write 200 words. Please write in your own words. Thank You!

Answer 1

Difference between Defined benefit pension fund and Defined contribution pension fund.

1)      Pension plans can be divided into two categories as Benefit and Contribution plan.

2)      Benefit pension plan is an employer sponsored retirement plan which provides specified amount during retirement. The pension amount is calculated based on certain factors like length of employment and salary history.

3)      Whereas, Contribution pension plan requires you to put your own money. It lets the employee and employer to contribute, which will be invested over a period of time and will be paid during retirement. In this plan, participant defers apart of his gross salary company matches the contribution equally. The money can be invested in Mutual funds, Annuities, Money markets etc.

4)      The main difference can be determined through finding which party bears the investment risks in both the plans.

Some of the benefits of Contribution Pension plan:

According to Section 80C of Income Tax Act, 1961, the tax payers are eligible for tax deductions of up to Rs.1.5 lakh.

·It encourages savings habit in employees. It is something like increasing savings through payroll deductions.

·Tax savings

·Tax shelter for the amount accumulated

·Employer matching the pension amount.

·There is liquidity during emergencies