The benefits of a flexible pension plan

If you have to pick between a flexible pension or your RRSP, which is the better option? Bruce Sellery says there is one clear winner.

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Question

I’m one of the lucky few with a defined-benefit pension plan. My company also has a flexible pension plan and matches the first 2% contributed. I’m wondering whether it makes sense to contribute to the flex pension plan or to my RRSP. At this point I think I want to retire before age 65, but that is more than 30 years away. Any advice?

Answer

I hope you like your job. Because if you like your job, and you have a defined-benefit pension, plus a flex plan with a 2% match, you’ve pretty much won the career lottery.

But your situation clearly isn’t just luck. You have also been managing your cash flow well enough that you have some money to contribute even more to your retirement savings. That takes discipline. So which way should you go? More to your RRSP or to your flexible pension plan?

I asked Matthew Ardrey to weigh in your question. He is a certified financial planner with fee-based financial firm T.E. Wealth. He says that unless there is a way to use your RRSP refunds to fund the flex pension contribution then he would favour the flex pension plan. He has a few reasons for this:

Flex the muscle of the company match

Ardrey’s first reason is pretty simple: you can’t beat free money. The company match of 2% might not seem like a lot, but it can really add up when compounded over time—a fact that a lot of people fail to appreciate.

Flex plan gives you flexibility

The second reason is flexibility. Contributing to your RRSP will increase the pot of money you’ll have to pay for groceries after you retire. But by contributing to the flexible pension plan instead, you’ll have other options available to you. “The purpose of the flex pension plan is to enhance one’s pension at a later date by using it to buy extra pension benefits or reduce penalties,” explains Ardrey. “Benefits could include indexing, a pension bridge, or increasing the survivor benefit. And penalties could include a reduction in benefits if you retired early.”

This last point is particularly relevant given that you have already identified an interest in retiring early. The flex plan contribution gives you more flexibility to do that than the RRSP.

RRSP contribution room retained

Another important point to know is that your defined-benefit pension reduces your RRSP contribution room, but the flex plan does not. “Flex plan contributions are typically considered to be voluntary and not tax deductible,” says Ardrey. “This means an employee can improve their pension without reducing their ability to save to a RRSP.”

If, down the line, you are able to afford both the flex plan contribution and an RRSP contribution, you will have some room to do that, making your nest egg even bigger. And as your income grows you’ll be pretty keen to defer as much income tax as you can inside an RRSP.

Ask some additional questions

The benefits of the 2% company match, flexibility and retention of RRSP contribution room are compelling. But Ardrey recommends you ask yourself these questions before you make your decision:

How long will you be at this company? If you intend to quit and go to work somewhere else in the near future, an RRSP is simpler.

Do the flex benefits meet your needs? Read the fine print and ensure that the flexible pension plan has the features that you will find the most useful, like reducing the penalty associated with retiring early.

What is the optimal contribution level? You’ll want to make sure that you don’t lose any contributions by putting in too much. Sometimes you can only contribute to the level of the benefits you’ll receive.

When do contributions vest and what can you do with them? The money you put into the flexible pension plan should vest. Once it does, check to see if you can transfer it out into a non-registered plan or to your RRSP. This isn’t a deal breaker, but will give you a better sense of how much flexibility you really have.

ask@moneysense.ca

One comment on “The benefits of a flexible pension plan

  1. The Belgium government is also heavily decreasing the tax advantages for having your own pension plan, pushing us towards a more fleixble pension plan as you stated

    I don't know how the pension plan system is in Canada (can't be worse than US?) but in Belgium we have 4 pillars for our pension plan:
    1st is the state pension itself (1.100€ approx).
    2nd pillar is your own pension savings which are with a bank in a fund.
    3rd pillar is through your employer, and
    4th pillar is the risky investment in pension funds.
    Although this seems like a good system, we will witness a decrease in the 1st pillar AND 3rd pillar (as our employer costs are huge.)
    In the end, it’s gonna be dificult for me and my children to have a nice transition from high-end income to our smeasly pensions.

    Well maybe not that interesting to you, but the more you know … :)

    Reply

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