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Defined Benefit Plan: Features, Benefits & Types Explained

Defined benefit plans are pension plans where the returns are predefined. Here, predefined means that both the employee and employer know the specific way in which returns are determined.

This type of pension plan is different from other retirement funds, where the payouts depend on the outcome of your investment. The investment decisions and risks in such plans are controlled and managed by an employer. ...Read More

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Pension Schemes and Retirement Plans

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Defined Benefit Plan

What Are Defined Benefit Plans?

Defined Benefit Plan
January 29, 2025

Table of Content

Features of Defined Benefit Retirement Plans

These are the benefits of investing in a defined benefit plan:

  • All of the benefits of these plans depend on your salary and the duration of your service.
  • Defined benefits plans are not the same as defined contribution plans. In the former, only the employer contributes to the plan. On the other hand, both the employee and employer contribute in a defined contribution plan.
  • In an unfortunate scenario, if the employee dies, the spouse becomes eligible to receive the benefit.
  • At the time of payout, you can receive the payment like an annuity plan via a fixed monthly payment or in a single lump-sum payment.
  • To avoid liquidity issues and offer these benefits, the employer should provide group insurance policies.

How Does a Defined Benefit Plan Work?

Generally, an employer offers defined benefit pension plans to increase the employee retention rate. Not only this, but they also try to ensure that the employee gets certain advantages at retirement. The amount depends on different things such as the employee's age, salary and how many years they have served in a company.

In rare cases, an employee may need to contribute to such plans, but in most cases, these are sponsored by employers. To get the advantages of these types of retirement plans, you have to work in an organisation for a certain number of years. This is known as the vesting period.

If you quit the job before the completion of this duration, you may not be able to get the full benefits from the plan. To lead a hassle-free life after retirement, you should always plan your retirement plan properly.

Different Types of Defined Benefit Plans in India

If you are an employee in India, there are both defined benefit plans and defined contributions plans you may look for. Here are the categories of defined benefit plans.

  • Gratuity Payment

    • Under the Payment of Gratuity Act, 1972, an employer has to pay an amount to the employee if he/she is employed for 5 years. It is also possible to get gratuity before this time if the employee becomes disabled due to an accident or disease.

  • Leave Salary

    • Under this, an employee can encash his leave balance. This is to promote work-life balance among employees.

  • Employee Life Insurance

    • This is an employer-funded benefit for the family of an employee. This is also applicable to employees' family members, such as children, spouses, and dependent parents.

  • Employee Personal Accident Insurance

    • In this plan, the employer pays a premium to provide personal accident insurance coverage. Under this, an employee gets coverage for medical treatment, disability or accidental death.

  • Workers Compensation

    • This is a statutory defined benefit plan provided by the employer for workplace-related injuries. Employees, workers or even dependents can claim this type of compensation.

  • Atal Pension Yojana

    • Especially for the unorganised sector, Atal Pension Yojana (APY) is a voluntary pension scheme. This is to ensure a minimum guaranteed pension for the citizens of India.

  • Guaranteed Pension Plans

    • Life insurance companies’ offer guaranteed pension plans where you can get a regular income after your retirement .

Advantages of Defined Benefit Plans

So, these are the main advantages of defined benefit plans:

  • Reliable Financial Support

    • As the returns are guaranteed, employees can get a certain amount every year when they retire. The returns are not dependent on market situations.

  • Payment Amounts Are Not Affected By Market Fluctuations

    • There is no link between the return and equity or any other market. You will get a predefined return even if the underlying assets do not perform well.

  • Chance of Spousal Support

    • One of the best advantages is that your spouse may be eligible to get the benefits of a defined benefit plan in case of your unfortunate death.

  • Profit-sharing and Other Tax Benefits For Employers

    • By paying for such schemes, an employer can also get tax deductions on their taxable income.

  • Better Employee Retention

    • As there is a guarantee in terms of return, the employees can get a certain amount every year when they retire. This makes defined benefits plans an attractive compensation package.

Summary

A defined benefit plan is a plus for employees who want to plan their future after retirement. As you can calculate the returns, retirement planning becomes easier. Also, if you want to invest in market-linked or high returns investment plans, you can make additional investments there. 

FAQs on Retirement Planning For Women

1. What is a defined benefit plan?

A defined benefit plan is a retirement plan where an employer guarantees a specific payout upon retirement depending on factors such as age, salary and years of service. This plan provides financial security for employees, as the income is predictable.

2. What is the disadvantage of a defined benefit plan?

The main drawback is that employees lack control over their investments. Also, the funds are less flexible and easy to access. Additionally, these plans can be costly for employers, and if mismanaged, they can create a gap between estimated returns and actual returns.  

3. How much money is in defined benefit plans?

The money that you can get depends on your age, salary and years of service with the employer. Also, different employers may choose different compensation plans.

4. How do you calculate a defined pension?

To find the defined pension amount, you can use the formula: Retirement Benefit = Accrual Rate x Years of Service x Final Average Pay.

5. Can you transfer a defined benefit pension plan?

Some certain defined benefit pensions are not transferable, like civil service, teachers, and state government schemes. To do so, you should discuss it with your employer. However, you may lose some benefits when you transfer it.

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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Disclaimers

1. Provided all due premiums have been paid and the policy is in force.

2. Tax Laws are subject to change from time to time. Tax benefits are subject to conditions under Sections 80C, 80D, Section 10(10D) and other provisions of the Income Tax Act, 1961.

NOTE: This material has been prepared for information purposes only, should not be relied on for any financial advice. You should consult your own financial consultant for any financial queries.

ARN - ED/01/25/20154