By iA Private Wealth, June 20, 2019
Workplace pension plans used to be commonplace, but they’ve become a luxury in recent times. Today, only a minority of working Canadians (37.5%) have one1. However, understanding the ins and outs of pensions – whether you participate in one or not – can offer more context concerning your own retirement planning and how best to maintain the lifestyle you want after you stop working.
PENSION PLANS 101
The two main types of plans are defined benefit (DB) and defined contribution (DC). While both help you reach your retirement goals, they’re each designed very differently. With DB plans, what’s “defined” or known in advance is the amount of income you’ll receive in retirement, typically based on your annual earnings and the length of time you’ve been in the plan. With DC plans, benefits are typically based on contributions you and your employer make, plus any investment income you earn on those contributions. While contribution amounts may be pre-set, the level of retirement income you receive from your DC plan depends on a number of factors, including the amount contributed to the plan, the number of years that money has had to grow and what it earned being invested.
The biggest difference between DB and DC plans lies in the bearer of the investment risk. Another key difference is that DC plan members have the ability to choose from a variety of investment fund options depending on risk tolerance and other factors, while with DB plans, investment management is handled entirely by the pension fund manager.
The obvious plus of being part of a pension plan is that they’re employer-funded, sometimes 100%. Opting out or choosing not to contribute to a plan is like saying no to free money. You also benefit from a disciplined savings approach and lower investment fees than tend to be available to individual investment accounts.
KNOW THE RULES
Benefits aside, you can set yourself up for a better experience as a plan member by being well-versed in the specifics of your plan, which could include:
DEFINED BENEFIT PLANS
Your plan’s vesting schedule determines whether you receive a full or partial pension and may factor in your decision to change jobs if you’re fully vested and don’t want to negatively impact your plan proceeds.
- CPP offset
If your plan is integrated with the Canada Pension Plan (CPP), you’ll receive a lower monthly pension from your employer to account for your government retirement benefits.
- Ancillary benefits
Some DB plans provide extra benefits, including for disability and death, and early retirement options.
DEFINED CONTRIBUTION PLANS
- Investment choice
Having the right asset mix is integral to ensuring you generate enough retirement income. When you enroll in your plan, you will likely be asked to choose from a number of all-in-one managed portfolio products that cater to a variety of risk profiles; you may also be given the option to go it alone and hand pick the individual investment funds that best suit your needs.
Understand the historical performance of your investments and pay attention to fees as they also impact your bottom line.
- Financial literacy
If you decide to build your own portfolio, it is crucial to be well-informed about the markets and investing best practices.
WHAT HAPPENS IF I LEAVE MY EMPLOYER BEFORE I RETIRE?
Common options for receiving accumulated pension funds include:
- Leaving your savings in the plan
- Transferring your savings to a new employer
- Transferring your savings to a pension retirement fund (LIRA or LRSP)
- Purchasing an annuity
- Cashing out some or all the plan’s value depending on your age and financial situation
DO I STILL NEED TO SAVE ON MY OWN?
Even with a pension plan, you may need to also save money in a Registered Retirement Savings Plan (RRSP) if, for example, the value of your pension isn’t enough to sustain the length of your retirement. This can happen when you haven’t been with an employer for long enough.
Another option for building a nest egg outside of your pension is a Tax-Free Savings Account (TFSA). Withdrawals from a TFSA are tax-free, as is any of the growth from its investments. And TFSAs have the flexibility to be used to fund a variety of short- and longer-term savings goals that don’t necessarily have to be retirement related.
WHAT HAPPENS TO MY PENSION WHEN I DIE?
The short answer is, it depends. If you’re married and part of pension plan when you retire, your options for survivor benefits will likely include continuing payments to your spouse upon your death, unless they waive their entitlement. This allows your spouse to receive a lifetime pension after your death, typically between 50% and 100% of the monthly amount that was paid to you. Your spouse would continue to receive these payments even if they remarried.
If you die before you retire, your spouse would automatically be the beneficiary of your pension. If you didn’t have a spouse, weren’t living with them or they waived their entitlement, the death benefit would be paid to your named beneficiary or your estate if you had no named beneficiary. Be sure to consider your survivor benefit options carefully to make the choice best suited to your financial needs and life situation.
AN INVESTMENT ADVISOR CAN HELP
With so much to remember about pension plans, it can be easy to lose track of where you stand when it comes to being retirement ready. A trusted and knowledgeable advisor can help you better understand how your pension works and create a retirement income plan that meets your needs – before it’s too late to adjust course. Contact an iA Private Wealth Investment Advisor near you.
This article is a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.