What is a defined benefit pension?
A defined benefits pension are a employee benefit that use to be extremely popular and today are somewhat a thing of the past. Technically, this sort of pension, is an income stream that one would earn by working at a company for several years. It is a fixed income stream that is not contingent per se on the stock or bond market. It is usually underwritten by an insurance company that guarantees the income stream. At retirement age the pension earner would have a window to select or choose what the terms are on the pension. This choice is almost always irrevocable (not able to be changed once made).
Typically a pensioner (person who has the pension) would have several options to choose from. There are several factors to keep in mind when making a selection:
- Health of all parties involved
- Reduction in monthly income for a spouse
- How one feels about inflation moving into the future
- How one feels about the company that is offering the pensions finances
- Ages of all parties involved (a large age difference could vastly impact what make the most sense)
- Whether or not a pensioner has life insurance in force that could pay a claim
There are also many risks that need thought through when one considers what to do with a pension:
- Equity market volatility risk
- Bond market risk (interest rate)
- Inflation risk (eroding purchase power)
- Pension risk (provider cannot make payments)
- Currency risk
- Life insurance risk (if coordinated with your selection)
Part of the services we offer to our clients and/or customers is a full service financial advisory package. We help look at financial matters and make educated decisions. If you or someone you know needs help reviewing their pension options please let us know. We are here to be a resource.
