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What is a defined benefits pension plan?

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There are 2 main types of pension plans in Canada: defined contribution plans, and defined benefit plans. Depending on which type your employer or sponsor offers, your retirement income plan might look a little different.

Canada Life only offers defined contribution plans, but you may have a defined benefit plan from another provider or an older plan. Defined benefit plans can be complicated, but here are the basics.

Complex formula, consistent results

With a defined benefit plan, your retirement income is decided by a formula. It considers how much you and your employer have contributed, how well the investments have done, and your average income in your top-earning years.

A formula might look something like this:

  • (2% of your total years of service) multiplied by your average income for your best five years = pension benefit

How is that different from a defined contribution plan?

In a defined contribution plan, your income depends on how much you and your employer have contributed and how well its investments have done.

So, unlike a defined contribution plan, the retirement income that you receive from a defined benefits plan is guaranteed to a certain extent.

You’ve got options

Regardless of which type of pension plan you have, you may want to supplement it with savings of your own – either to give you more control over your savings and investments, or to make sure you have money available for other long-term expenses if you need it.