If you have a pension plan at work, you’re one of the lucky ones. Of the 17.6 million Canadians in the work force, only about six and a half million have a pension plan. There are about 10,000 pensions in Canada, and 55% of those are held in the public sector. So while you might think that loads of people have company pension plans, the truth is those people are in the minority. Even worse, many of you who are enrolled (or eligible to enroll) don’t understand how your plans work.
Pension plans fall into one of three basic categories:
- Defined benefit (DB) plans,
- Defined contribution (DC) plans, and
- Group RRSPs.
DB plans promise to pay out a regular income calculated according to a predetermined formula. You know exactly how much you’ll receive at retirement, but until then the rest will be a bit of a mystery.
DC plans define the annual contributions required by the employer (and in many cases by the employee). The size of the pension depends on the amount of money accumulated through contributions and earnings in the plan.
Group RRSPs function a lot like regular RRSPs except that your employer runs the plan and you make contributions by payroll deduction. Some employers match contributions, but that’s not a given. If contributions are made by the employer, those contributions are taxable as income to you, and your total contributions can’t exceed the annual maximum RRSP contribution limit.
Both you and your partner should have a good understanding of your pension benefits. Here are three things you’ll want to know for sure.
Will your plan will continue to pay your spouse an income after you die?
Some company pensions end with the death of the pensioner. Others pay a reduced percentage to the surviving spouse. If there is no continuation of income, or if that income will be reduced significantly, both of you will have to make some decisions about how you structure your other sources of retirement income.
Is your pension is indexed?
Inflation can eat away at your pension benefits. Check to see if your pension provides for full or partial indexing, and find out when that indexing kicks in.
Is your pension integrated?
In other words, will your pension benefits be blended with CPP to provide your income? If your company pension plan is integrated, whenever you get pension income estimates from your employer don’t double-count your CPP benefits.