As you approach retirement, it’s important to understand all the different pieces that will make up your financial Puzzle. One of these pieces is your company pension. In this blog post, we’ll take a look at how Canadian company pensions work and what you need to know in order to make the best decisions for your retirement planning.
Defined benefit pension plans in Canada are becoming increasingly rare
It appears that the days of traditional defined benefit pension plans in Canada are numbered. With an aging population, significant changes in lifestyle and work habits, and global economic shifts, more employers are choosing to move away from offering defined benefit plans as a part of their workforce benefits packages. Instead, they are providing other pension options that allow employees to customize their retirement packages such as Defined Contribution Plans. Despite these developments, some organizations, particularly governments, continue to offer long-term employer-sponsored pensions plans. However, it looks like these practices may gradually become extinct in favour of more individualized offerings.
Many companies are now offering defined contribution pension plans instead
In recent years, many companies across the globe have switched to offering their employees a defined contribution [DC] pension plan instead of traditional defined benefits [DB] pension plans. This type of pension, the DC, allows employees to contribute funds towards their own retirement savings and take benefits from the account when they reach retirement age. As these plans are funded by the employer & the employee, there is much greater flexibility when it comes to how much an individual can access in retirement and how long money can continue to stay in the account for those who don’t need the funds yet. Defined contribution pension plans are becoming increasingly popular due to being a more cost-effective way for employers to provide pensions for their workforce. Plus, importantly, the employer is not liable for the responsibility of providing income for life to the employee. That onus falls to the employee. For example, thing of a small manufacturer. This company does not want the responsibility of guaranteeing income to a retired employee for 25 – possibly 35 years. What if the stock market tanks? That employer is on the hook to fully fund the DB plan. Whereas, with the DC plan, the employer deposits to the plan while you work. When you retire, you take the money. The employer says good-bye. That’s the end of employer responsibility.
How a defined contribution pension plan works
A defined contribution [DC] pension plan is a type of retirement savings plan in which employers and employees both contribute to one plan. Employers typically provide matching funds, so the employee’s contributions are added to a pool of funds managed by investment fund managers. The ultimate goal of a defined contribution pension plan is to build an investment portfolio that returns annual profits over your working life and prepares the employee for their retirement years. Generally, these types of plans have vesting periods of two years – this means that employees must work with their organization for a certain amount of time before they ‘own’ the funds from their plan. This helps handcuff an employee to the organization for 2 years.
Tips for getting the most out of your company pension plan
Contribute enough to maximize the “matching” by your employer. You double your money in year one. Making the most of your pension plan is an easy way to leverage your current employment for a comfortable retirement. There are several simple steps you can take to ensure that you maximize the benefits of your plan. First, it is important to review the rules of your specific plan and determine how much and when you can contribute. Next, familiarize yourself with the investment options available through your plan and choose those that best suit your individual goals and risk preferences. Lastly, take advantage of any applicable tax breaks or employer match contributions under your plan; this may help enhance retirement savings income while also reducing taxable income in current years. With a bit of planning, you can easily make sure that you get the most out of your company pension plan.
As we’ve seen, defined benefit pension plans are becoming rarer in Canada with many companies offering defined contribution pension plans instead. Many workers may feel unsure about this change, but with the provided tips above, you can make sure you get the most out of your company pension plan and have peace of mind regarding your retirement. As it’s never too early to start planning for the future, we hope this blog post has helped inform and clarify the process for you.
Reach out to Pension Solutions Canada today to get help with planning your retirement, and maximizing your pension options.