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Defined benefit definition

A defined benefit pension scheme, also sometimes known as a final salary pension scheme, is one in which an employer promises an employee a specified payment once that employee retires.

Defined benefit definition

A defined benefit pension scheme, also sometimes known as a final salary pension scheme, is one in which an employer promises an employee a specified payment once that employee retires.

The payment could include a regular payment, a lump sum, or the combination of the two, and it is usually based on how many years the employee worked for the employer and the salary the employee earned when he or she retired or on a career average salary. The employer contributes to the scheme and is responsible for ensuring there’s enough money in it to pay the employee’s income throughout retirement. The income may continue to be paid to a spouse or partner once the employee dies.

Alternative pension schemes include a defined contribution pension scheme. A defined benefit scheme differs from a defined contribution scheme in that it guarantees the amount the employee will earn through his or her retirement and it is paid directly to the employee. The employee won’t have to decide what to do with his or her pension pot on retirement as is the case with the defined contribution scheme.  

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