Understanding your pension plan
If you're like many Canadians, your employer-sponsored pension plan will be one of your most important sources of retirement income. Knowing how it works will help ensure your finances won't stand in the way of your retirement dreams.
Nearly half of all Canadians expect their employer-sponsored pension plans to contribute significantly to their retirement income, but many don't even know what type of plan they have or how much it will pay in retirement.*
It's easy to see why there is so much confusion about company pension plans. Employer-sponsored pension plans are as varied as the companies that offer them, with numerous choices and options – and lots of puzzling terms like “vesting” and “flex benefits.” And company pension plans are so automatic, it's easy to ignore them until you need the income … but by then, it may be too late.
Pension plans – what are they?
There are two basic types of registered employer-sponsored pension plans, regulated by government:
Defined Benefit (DB) pension plans "define" or guarantee a specific pension amount paid to you regularly from when you retire for the rest of your life. The amount of your DB pension benefit is set according to your age, length of service and your salary. (The benefit may or may not be indexed to increases in the cost of living). Over 85 per cent of all Canadians enrolled in a pension plan are in a defined benefit plan.
Defined Contribution (DC) pension plans, also known as a money purchase plans, do not guarantee the amount of future benefits. Instead, DC retirement income depends on accumulated contributions and the investment returns earned by these contributions. With a DC plan, your contributions are combined with your employer's contributions, plus the investment earnings on these contributions, to purchase a life annuity contract that pays you retirement income.
Your employer may offer other plans to help you save for retirement
In Group Registered Retirement Savings Plans (RRSPs), regular contributions are deducted from your employment income. It's important to remember that the total contributions into your Group RRSP, plus other personal RRSPs, cannot exceed your personal annual maximum contribution limit as set by the Income Tax Act ( Canada ).
Deferred Profit Sharing Plans (DPSPs) are funded solely by your employer and do not have the same rules as registered pension plans. With a DPSP, the size of your retirement benefit depends on how well the investment performs over time.
Why is it so complicated?
There are decisions to make when joining a plan – like your contribution amount and in some cases your choice of investments. These choices are important as they could directly affect the amount of your benefits.
If you leave an employer, you must make decisions about what to do with your pension plan benefits – like transferring the plan or taking the benefits in cash. The choices available to you depend on the type of pension plan you are in.
Once you retire, when and how you elect to receive your pension will also have a direct impact on your income.
Helping you to sort it all out
The ways you save, the choices you make about your pension plans and registered and non-registered investments, and the steps you take to protect your assets – all play a vital role in generating the retirement income you expect.
An Investors Group Consultant can help you understand all your sources of retirement income and build a plan focused on your retirement dreams, so there will be no surprises.
* Decima eVox survey for Investors Group, October 20-30, 2006.
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This article, written and published by Investors Group, is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.
© Copyright 2007, Investors Group. All rights reserved. Do not reproduce without the express written consent of Investors Group.
