Welcome to the Financial Column in association with Money Plus, the award winning Financial Services company on Bridge Street in Boyle.
Q. I have just completed my 6 month probationary period with my employer, a company.
My employer has a defined contribution pension scheme and I’m wondering whether it’s worth joining it. I’ve heard that this isn’t as good as a defined benefit scheme. What do you think?
A. Firstly, it’s not really a case of one being better than the other. Defined benefit schemes have often been described as “gold-plated” or the “Rolls Royce” of pension schemes due to the perception that they “guarantee” you a pension of two thirds (66%) of your salary at retirement.
However, with people living longer in retirement and with low interest rates, the cost of providing defined benefit pensions has become much higher. Most employers are no longer willing or able to pay these costs and most defined benefit schemes have been closed off for new employees. Many existing defined benefit schemes have cut the benefits they pay.
In a defined contribution pension scheme, both you and your employer pay in a percentage of your salary into the scheme to build up a pension fund in your own name. The value of this pension fund at retirement will be a combination of the contributions paid in together with any investment growth generated. It is hard to see why it wouldn’t be in your interest to join your employer’s scheme when your employer is also paying into the scheme. Indeed, some employers will pay more if you pay more into it. This is worth considering if you can afford it as the larger your pension fund, the more likely you are to be able to enjoy a good lifestyle on retirement.
For advice on defined contribution pension schemes and retirement planning please consult Belinda McCauley at Money Plus, your local independent financial broker. Belinda and her colleagues at Money Plus, Bridge St, Boyle would be delighted to help you. Belinda can be contacted at 071-9194000/086-7847827 or by email: [email protected]