3 Different Pension Plans In Canada

pension plans
Pension Plans in Canada
Defined
Benefit Plan		 Defined
Contribution Plan		 Group
RRSP
Employee Advantages
  • Usually based on years of service and salary
  • Guaranteed pension income
  • Employer covers administrative costs and investment risk
  • Creditor proof
  • More flexible than a defined benefit plan
  • Creditor proof
  • Often many investment choices
  • Flexibility in retirement and estate planning
Employer Advanatages
  • Makes older workers easy to let go
  • Simpler and less costly than DB plans
  • Employees bear investment risk
  • No pension standards required
Contributions
  • Based on actuarial calculations: age, gender, life expectancy, earnings growth
  • Sometimes fully paid by employer
  • Possible employee contribution option
  • Required by employer
  • Often a fixed contribution rate
  • Deducted from pay, within regular RRSP limits
  • Only employees may contribute; some employers raise pay and compel participation
Tax Implications
  • Usually employer alone contributes
  • If employee contributes, deductible up to amount outlined in plan text
  • Employee contributions deductible up to a yearly maximum of $13,500
  • Employer contributions are taxable and subject to CPP/QPP and EI
Vesting
  • Generally 100% two years after joining the plan
  • Generally 100% two years after joining the plan
  • Vest immediately
Portability
  • Awkward when switching
  • Three choices: leave "as is" and collect benefits at retirement, transfer to new employer, open LIRA
  • Simpler to move than DBs
  • Usually same as for DB but value more transparent
  • Easily transferable to another RRSP or employer plan
Withdrawals
  • At retirement only
  • At retirement only
  • Permitted but discouraged before retirement, firms may suspend contributions
At Retirement
  • Monthly pension cheque or life annuity often based on last five years' earnings
  • Maximum $1,722.22 per year of service; eg. $60,277 for 35 years
  • No guarantees; pension depends on investments
  • Convert to either an annuity, locked in RRSP or Life Income Fund (LIF)
  • Payout depends on contributions and investments
  • Cash or transfer to another registered plan
Cautions
  • Watch assumptions on annual statement
  • Might be intergrated with CPP/QPP benefits
  • May not be adjusted for inflation
  • Limits RRSP contribution room
  • Do your home work and study investment choices carefully
  • Ask for propectuses and portfolio expenses
Government Regulations
  • Provincial and federal pension legislation
  • Income tax act
  • Provincial and federal pension legislation
  • Income tax act
  • Not subject to pension laws

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