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How does a defined contribution plan work? You build up the pension fund with contributions throughout your career and then it is up to you to make sure that it lasts you till your death?
I am at a job with a defined benefit plan and am being offered a job with a defined contribution plan but higher salary (10% higher). I am not able to make up my mind about whether to switch?
The end result is basically the same, it's just a choice of whether you want to base the final amount you receive on your salary, or on the stock market.
You pay in a set proportion of your salary, and receive a set proportion of your salary in return.
The pension (both contributions and benefit) are based on your career earnings. You get x% of your salary every year from retirement until death.
These are just a private investment, basically: you pay a set amount in, and whatever is there is what you get at the end.
Normally you would buy an annuity with the final sum, which pays you a set amount per year from retirement until death, as with the above.
The amount you receive depends on how much you pay in, and the performance of the investment. If the stock market does well, you'll get more. If it does badly, you could actually end up with less.
In general (in as much as anything relating to the stock market and investment can be generalised), a Defined Benefit plan is usually considered better for "security" - or at least, public sector ones, and a majority of people in my experience would prefer one, but it entirely depends on your personal attitude to risk.
I'm on a defined benefit plan and like the fact that I basically get a benefit based on a proportion of my salary and that the amount is guaranteed, no matter what happens to the stock market in the meantime. I pay in 9% of my salary get 2% of my salary as pension, for each year I pay into the pension: no questions, no if's or buts, no performance indicators.
Others prefer a defined contribution scheme because they know that it is based on the amount they pay in, not the amount they earn (although to an extent it is still based on earnings, as that's what defines how much you pay in), and because it has the potential to grow significantly based on the stock market.
Unfortunately, nobody can give you a "which is best" answer - if I knew how pension funds were going to perform over the next 10-50 years, I wouldn't be on StackExchange, I'd be out there making a (rather large) fortune on the stock market.
It is comparing apples to oranges. From govt or institution point of view defined contribution is better than defined benefits as they don't have to carry obligations.
Although defined benefit sounds good, one can't guarantee it will be enough when you retire compared to inflation. It often becomes political issue.
Defined contribution puts you in charge.
