Which Retirement Plan is a Defined Benefit Plan?

Planning for retirement is one of the most crucial financial moves you need to make to ensure you spend the golden years of your life peacefully. There are many different types of investment instruments available in India where you can invest to build your retirement corpus. While some of them carry market risks, some offer fixed benefits on maturity and are known as defined benefit plans.In this article, we’ll talk about the defined benefit retirement plans in detail and learn how you can benefit by investing in them. Let’s get started.

As stated above, a defined benefit retirement plan is a type of pension plan that offers certain guaranteed benefits to the investor at the time of his/her retirement. The biggest advantage of such a plan is that you will know the pension amount you will receive at the time of your retirement beforehand.The pre-assured pension amount offered by a direct benefit plan is calculated via a formula which takes into account the age of the investor, salary, and the total number of years left for his/her retirement.Usually, the direct benefit plans are used by the employers to provide a pre-determined pension to their employee(s) after his/her retirement.

• The principal advantage of a defined benefit retirement plan is that you’re promised a guaranteed pension amount after your retirement. Since the returns are not dependent on the market performance, you do not have to worry about the risks that can affect your investment and bring down the returns.
• Another benefit of this plan is that you can choose to receive your benefits at the time of maturity in multiple ways – you can either choose to receive your entire maturity amount as a lump sum or you can opt to receive it as fixed monthly income by spreading maturity benefits over the years.
• The biggest drawback of this type of plan is that it often fails to provide inflation-beating returns as is the case with most of the market-linked plans. Moreover, the use of reducing interest rates and rising cost of annuity make such plans even more unfeasible.

Central Civil Services Pension Scheme (CCSPS) and Public Sector Bank Pension Plan (PSBPP) are some of the government-sponsored defined benefit retirement plans available in India. However, these schemes are available to existing central government employees only. To qualify for these plans, you have to be in a government service for at least 10 years.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.