If you are fortunate enough to have a pension you still have to understand how the stream of income works at retirement. There are two basic pension plans, defined contribution pension plan (sometimes referred to as a money purchase pension plan) and a defined benefit pension plan.
A defined benefit pension plan provides you a level stream of income at retirement regardless of what is going on in the financial markets. Of course, each plan is administered a little differently depending on what terms your employer works out with the provider. Some defined benefit plans (DB plans) have inflation adjustments or they have a bridge benefit which provides an additional income if you retire before the age of 65. (It is meant to supplement income until you reach the normal age of being a CPP beneficiary regardless of when you actually take your CPP).
Defined contribution plans (DC plans) are somewhat like RRSPs in that you chose your own investments and DC plans will experience the volatility of the financial markets before and during retirement. At retirement, you cannot take out all the funds, like you are allowed to in a RRSP situation, but rather you are restricted based on a percentage of the value of the account at the end of each year. The year end value will then dictate your income for the following year. As a result your cash flow will change year-to-year if you have a DC pension plan.
Understanding the basic concepts of each type of pension plan can help when trying to ascertain your income at retirement as a pension is, typically, one of the biggest building blocks of retirement income.
