An employer pension plan is a registered plan that provides you with a source of income during your retirement. Under these plans, you and your employer (or just your employer) regularly contribute money to the plan. When you retire, you’ll receive an income from the plan.
There are different types of pension and retirement plans you should be aware of when retiring in Canada. Not all employers have these plans, so you’ll want to double check with them before retiring.
Defined Benefit Plans
Some plans are called defined benefit plans. These are the most common plans. They are also sometimes referred to as “final-pay plans”, because the amount you receive from the pension plan depends on the pension you were earning near the time you retired. Your yearly pension is based on a formula that takes into account your salary near the time you retire.
Defined Contribution Plans
Other plans are called defined contribution plans. These plans are based on the amount of money that you and your employer have deposited into the plan. The amount of pension you’ll receive when you retire depends on the amount of contributions you’ve made to the plan, the interest earned on the contributions, and the length of time that you’ve been making contributions.
Deferred Profit Sharing Plans
Your employer may also have a Deferred Profit Sharing Plan (DPSP) for you upon retirement. Contributions into this plan can only be made by your employer. Those contributions, as well as any forfeited amounts that are reallocated to a beneficiary, are included in your pension credit for a year. The pension credit represents the benefit earned during the year and it reduces the amount that you can contribute to your registered retirement savings plan in the following year.
Next steps when you are close to retiring with one of these plans
- Read the information your employer sends employees about the pension plan
- Contact your employer or pension plan administrator if you have any questions
- Find out if you have to make any special pension-related decisions while still working
- Find out what happens to your pension after you retire
- Find out how you can take your pension benefits
- Find out how you can change the way you receive your pension
If you’re about to retire, you can also ask your pension plan administrator for a copy of the Statement of Pension Adjustment (S.O.P.A.). This statement shows the value of benefits you earned under your employer’s Registered Pension Plans or Deferred Profit Sharing Plans.
Read The Information Your Employer Sends About Your Pension Plan Carefully
The information you get from your employer about your pension plan will help answer some critical questions you should know the answers to in order to prepare for your retirement. If you don’t get the answers from the informational material your employer provides, be sure to call someone in the HR department and ask them questions so you have the answers you need.
Some questions you’ll want to know the answers to:
- What type of pension plan does your employer have? (eg. Defined-benefit, Defined-contribution, etc).
- How does your employer calculate the amount you will receive when you retire?
- What happens if you leave the company before you can collect your pension?
- What happens if the plan goes bankrupt?
- What are the rules for changing your pension benefits?
- How much money has been contributed to the plan, and how much money will be left when you are eligible to retire?
- How much of your contributions are tax deductible?
- At what age can you start to collect your pension?
- Are you able to retire early? If so, how will it affect your pension?
- How much will your beneficiaries get if you die before you reach the normal age of retirement?
- Who will get your pension if you die before you reach the normal age of retirement?
- What happens if you leave the company or change jobs before you can collect your pension?
- What happens if the plan goes bankrupt?
Obtaining A Final Pension Statement
When you retire, you must get a final statement that tells you the value of your pension. Bond rates change every day, so it’s important to get this final statement with an actual final value amount (the commuted value) so you can start to plan with your Certified Financial Planner what you’ll do next with that amount of money. You can also take that final pension statement and shop around for a Copycat Annuity from a Canadian financial institution, which may also lead to a cash surplus (extra bonus cash paid to you on top of your pension).
If you are going to get a lump-sum payment, the statement must give you information that will help you decide whether to take the lump-sum payment or to take a monthly income from the plan.
The team at Pension Solutions Canada specializes in helping individuals prepare for retirement and protect their assets. If you’re unsure about the next steps to take for retirement, you’re wondering if you’ll have enough money when you retire, or you’re looking for information about moving your pension away from your employer, give us a call. We can help! We’ll also assist you with estate planning, address tax minimization, and answer all of your retirement questions.
Call us at 1-888-554-6661 to get started. Our services are no cost to you.