What is a Superannuation or Defined-Benefit Plan?

Posted on July 21, 2017 By

Superannuations are pension programs created by companies for employees’ benefits. Sometimes called a pension plan, funds deposited will typically grow without tax consequences until withdrawal or requirement. In most cases, these are defined-contribution or defined-benefit plans.

A Brief Breakdown of Superannuations

As funds are put in through employer and employee contributions, as well as other growth vehicles, they are held in the Superannuation fund. This type of fund is used to pay pension benefits as employees reach eligibility.

How Does an Employee Become Eligible?

Employees are considered superannuated when they reach a certain age or they become disabled. At that time, the worker can withdraw his or her benefits from the fund. These funds differ from other types of retirement investments because the available benefit is defined by a schedule and not by the investment’s performance.

An Explanation of Defined-Benefit Pension Plans

As defined-benefit plans, superannuations provide a predetermined, fixed benefit that depends on a variety of factors other than market performance. These factors include the person’s employment duration, his or her salary, and the age at which they begin to receive the benefit.

Why Employees Like Them

These plans are valued among employees because they’re predictable. While employers may find them complicated to administer, they allow for more significant contributions than other employer-sponsored retirement plans do. Upon retirement eligibility, an employee gets a fixed payment each month according to a pre-existing formula. In this way, superannuations are similar to Social Security benefits given upon reaching an eligible age or under certain circumstances.

How Superannuations are Different From Other Retirement Investment Plans

While these plans guarantee a set benefit once an employee is eligible, other retirement investments may not. While separate investment choices do not affect superannuations, retirement plans such as IRAs or 401(k)s can be affected by market shifts. In this sense, the benefits from an IRA or 401(k) might not be as predictable as those given through superannuations.

Workers on defined-benefit plans shouldn’t have to worry about the amount in the account, and they are at little risk of running out of money before passing on. With other investment types, poor performance could cause a person to lose all their money before death.