This is an arrangement by a union or an employer to provide pensions to retired employees in the form of periodic payments for their lifetime. To plan for retirement you will need to know approximately how much you will receive from your plan. Knowing your plans benefit formula, checking your annual statement provided from the plan, or calling your plan for an estimate, are ways you can find out your accrued pension under the plan to date.
The two most common types of pension are Defined Benefit and Defined Contribution.
Defined Benefit Plan
A defined benefit (DB) plan is a plan in which the retirement benefit is determined by a set formula, rather than depending on investment returns. A benefit in a defined benefit pension plan is determined by a formula that can incorporate the employee's pay, years of employment, age at retirement, and other factors.
Defined Contribution or Money Purchase Plan
In a defined contribution plan, contributions usually based as a percentage of salary, are paid into an individual account for each member. Investment risk and investment rewards are assumed by the member and not by the sponsor/employer. The benefit is dependent on how the portfolio performs with no guarantees as to how much income you’ll receive during retirement. In addition, members do not necessarily purchase annuities with their savings upon retirement, and bear the risk of outliving their assets.