What Are Pension Plans?

Whether you’ve just started your career or have been working for decades, you should be thinking of how much you need to save and invest so you can retire. So, what are pension plans: a pension plan is a type of program that helps your save money for your retirement. Your employer, union, or government may contribute to a pension that you can access when you retire.

Defined Benefit and Contribution Pension Plans

Employer pension plans are savings plans registered with the government that allow you to contribute funds for your retirement. Depending on your benefit package, your employer may contribute a percentage to your pension. There are two main types of employer pension plans: defined benefit and defined contribution plans. According to the Government of Canada, defined benefit plans are pensions where your employer commits to paying you a defined amount that is based a certain set of parameters (e.g., years of service, age, salary). Both you and your employer contribute to the fund, which is pooled with other employees. With defined benefit plans you do not have access to your total funds and your employer manages the investments and disburses the funds to you regularly like a paycheque. You will receive a defined amount at retirement and your benefit is not affected by how the fund performs in the market. Your pension may also be indexed for inflation, meaning your benefit will increase with the rate of inflation to offset increases in the cost of living.

Defined contribution plans are workplace pensions where you know how much you have to contribute to the plan but you don’t know how much you will receive at retirement. Whether or not your employer contributes, your funds are not pooled with other employees, and you are solely responsible for choosing the investments. Your funds are placed in a certain investment vehicle on your behalf, which is typically selected based on your risk tolerance. If you leave your employer or when you retire, you are required to roll your fund into an investment vehicle that you can withdraw from like a LIRA (Locked in Retirement Account), RRSP (Registered Retirement Savings Plan), or RRIF (Locked in Registered Retirement Income Fund). Depending on the fund amount, you may be able to withdraw money and/or reinvest money into a type of fund that is not locked in (e.g., tax free savings account).

Group RRSP and PRPP Pension Plans

There are also other types of retirement accounts that your employer may provide access to:

1. Group registered retirement savings account (RRSP): RRSPs (similar to 401 K plans in the US) are funds that you open through you employer, which you and/or your employer pay into. These are registered accounts that provide a yearly tax break, an incentive the government provides for investing in your future retirement.
2. Pooled registered pension plans (PRPPs): These plans typically exist in situations where employees don’t have a pension with their workplace. Like defined contribution plans, the amount your receive at retirement depends on how the investments perform. You or your employer can opt out of paying into these funds.

Personally, I have almost all of these pension plans due to the options I’ve received from different employers over the years. I’ve been thinking of which pension type is the best. It seems like defined benefit plans are the most generous. Depending on whether you meet your plan’s parameters (e.g., your years of service etc.) you may be able to receive your same or a similar income as you did when you were working. In some instances retirees can expect to receive their highest salary indexed for inflation throughout their years of retirement until they pass away.

Working with Pension Administrators

It’s very important to know what you’re entitled to with your pension and what happens to your pension when you leave your employer. Make sure to read your benefits booklet and to contact the pension’s administrator or human resources team if you have questions.

Conclusion

Planning for retirement is essential at any career stage. Understand the pension options available to you, whether they’re defined benefit or defined contribution plans. Keep track of your benefits, review your plan regularly, and ensure your family knows their entitlements.

Whether you’re a tradesperson or a corporate employee, your workplace pension will be invaluable tool in your future budget and your financial future. By reviewing your pension details and seeking professional advice when needed, you ensure that the benefits of your hard work will continue supporting you and your loved ones long after you’ve left your career.