In the workplace, you’ll often hear the term “retirement pension.” However, terms like DC, DB, and IRP can feel unfamiliar and confusing. In this article, we’ll break down the basic concepts of retirement pensions and clearly explain the differences between each type.
Table of Contents
- What is a retirement pension?
- Defined Benefit (DB) Pension Plan
- Defined Contribution (DC) Pension Plan
- Individual Retirement Pension (IRP)
- Comparison Summary by Pension Type
- Which Plan is Better?
1. What is a retirement pension?
A retirement pension is a system where the employer deposits retirement funds with external financial institutions (such as banks or insurance companies) instead of keeping them internally. This ensures that the employee’s assets are safely managed until retirement and can be received either as a lump sum or in installments.
2. Defined Benefit (DB) Pension Plan
The DB plan (Defined Benefit) guarantees a fixed amount to be paid upon retirement. The retirement amount is determined based on the length of service and average salary. The employer is responsible for managing the funds.
- ✅ Calculation: Based on “30 days of average wage per year”
- ✅ Fund management responsibility: Employer
- ✅ Advantage: Employees can predict the retirement amount
- ⚠️ Disadvantage: Poor management by the employer may increase financial burden
3. Defined Contribution (DC) Pension Plan
The DC plan (Defined Contribution) involves the employer contributing a fixed amount annually, while the employee manages the investment. The amount received at retirement varies based on investment performance.
- ✅ Contribution: “30 days of salary per year” deposited into a retirement account
- ✅ Fund management responsibility: Employee
- ✅ Advantage: Potential to grow assets beyond base retirement amount
- ⚠️ Disadvantage: Retirement amount may decrease if poorly managed
4. Individual Retirement Pension (IRP)
An IRP (Individual Retirement Pension) is a system that allows not only retirement funds but also additional personal savings. Whether you're enrolled in a DB or DC plan, you can transfer your lump-sum retirement money to an IRP after retiring to continue investing, or make extra contributions personally while still employed.
- ✅ Eligibility: Anyone, whether retired or currently employed
- ✅ Contribution: Transfer of retirement funds or make additional personal payments
- ✅ Tax benefits: Eligible for tax deductions during year-end tax filing
- ✅ Advantage: Continued asset management after retirement + tax savings
- ⚠️ Disadvantage: Early withdrawal may result in penalties
5. Summary Comparison by Pension Type
| Category | DB Plan | DC Plan | IRP |
| Fund Manager | Employer | Employee | Employee |
| Payout | Fixed based on average wage at retirement | Varies based on investment performance | Determined by performance + contributions |
| Contribution Method | Employer manages the fund | Employer contributes, employee manages | Employee contributes and manages directly |
6. Which Plan is Better?
There is no single right answer. However, here are some guidelines:
- If you want a stable retirement payout, the DB plan is advantageous
- If you’re financially knowledgeable and want control, the DC plan is a good choice
- If you want extra savings and tax benefits, consider supplementing with an IRP
Be sure to check how your company manages its retirement pension system and choose the option that aligns with your financial goals and retirement plans.
