In Canada, pensions are a type of retirement savings plan that most people contribute to through their employers. Pensions are an important part of many people’s retirement planning, as they provide a regular source of income during retirement. There are two main types of pensions in Canada: defined benefit pensions and defined contribution pensions.
Some companies offer their own pension plan that employees get to be a part of. Pensions are regulated by the federal government, so there are certain rules that employers must follow. For example, pensions must be registered with the federal or provincial government, and employees must be given information about the pension plan when they join the company.
If your company has a pension plan, make sure you know whether your plan is a Defined-Contribution Plan or Defined-Benefit Pension Plan, and understand the differences between the two.
Defined-Benefit Company Pension:
A defined benefit pension is a type of pension you get from your employer, where the amount of money you receive during retirement is determined by a formula, based on your years of service and salary. Defined benefit pensions are becoming less common in Canada, as they tend to be more expensive for employers to maintain, plus the employer assumes all the risks. The employer guarantees the payments so that if there is a shortfall, now or ever, the employer must make that up. If your employer goes bankrupt or leaves Canada, who is going to pay your pension? Ask Sears Canada employees. They all saw their pension income cut. Drawing a DB pension from the government is great but drawing same from a small company has risks. If your pension is with a company, consider the copycat pension when you retire.
Defined-Contribution Company Pension:
A defined contribution pension is a type of pension from your employer, where the amount of money you receive during retirement is based on how much you and your employer have contributed to the pension plan, as well as the investment performance of the plan.
Tip: Always make the maximum contributions, especially if your employer matches you dollar for dollar on your contribution amount.
The Canada Pension Plan:
The CPP is a government-sponsored pension plan that working Canadians contribute to through their employers. The CPP provides a monthly retirement income for eligible Canadians, starting at age 65. You can choose to start receiving your CPP benefits as early as age 60, but your benefits will be reduced if you do so. Or, defer your CPP and draw a higher amount later. [This is a good idea.]
Your company pension (defined-benefit or defined-contribution pension) and your CPP are independent from each other. When you take your company pension, it has no impact on your CPP entitlement. The same holds true in the reverse, when you take your CPP it has no impact on your company pension entitlement.
Even though these pensions are separate, sometimes your company DB pension may ‘coordinate’ with your CPP, where contributions to and benefits from your company pension may take into account your CPP participation. There may be a ‘bridge benefit’ (a temporary pension that fills the financial gap between early retirement and age 65), and/or your company pension might alter the amount of money you receive once you reach age 65, which is typically when people start taking their CPP payments. Make sure to read your company pension plan details to know exactly what your payments will be once you retire and which age is best for you to retire to maximize your pension payout. When in doubt, connect with us. Book a 15 minute free Zoom call on our website.
Other Pensions in Canada
There are a number of other pensions in Canada that you may be eligible for, depending on your employment situation. These include the following:
Public service pensions:
If you work for the federal government, a provincial/territorial government or a municipality, you will likely be enrolled in a public service pension plan. The pension benefits you receive from a public service pension plan are separate from the CPP and any company pensions you may have. It includes a lifetime pension payable until your death, plus a temporary bridge benefit. Once you reach age 65, which is the age when CPP typically begins, the bridge benefit stops. These are DB pensions.
If you are a teacher, you will likely be enrolled in a teachers’ pension plan (TPP). The pension benefits you receive from a teachers’ pension plan are separate from the CPP and any company pensions you may have. The TPP works with the CPP, where contributions to and benefits from Ontario Teachers’ take into account your participation in CPP. Old Age Security (OAS) has no impact on your Ontario Teachers’ pension. This too is a DB pension. You can take the commuted value only prior to age 50.
In conclusion, pensions in Canada can be a bit confusing. However, it is important to understand what pensions you are eligible for and how they work. It is also important to make the maximum contributions to your pensions, so that you can receive the most benefits during retirement. Pensions are an important part of retirement planning, so make sure you understand how they work before making any decisions.
Do you have any questions about pensions in Canada? Contact us today.