What You Should Know About Pensions, Retirement Benefits, and RRSP’s
By the Monster Career Coach
Freedom 55: a slogan dreamed up by The London Life Insurance Company of Canada for its retirement savings products that helped set expectations of early retirement for an entire generation.
But for most Canadians early retirement will be nothing more than a dream. About two-thirds of all workers lack a workplace pension program and 1.6 million seniors at the low end of the wealth scale are trying to get by on less than $15,000 a year, according to a Globe and Mail report.
Which makes it all the more important for you to be aware of your retirement savings options and how they will affect your prospects for a comfortable, predictable stream of income once you stop working.
There are basically three types of sources you might have for retirement income:
1. A pension you receive from an employer, if available
2. Modest retirement benefits provided to you by the government
3. Your own savings that you accumulate over time
1. A Pension You Receive From An Employer
WHAT IS AN EMPLOYER PENSION PLAN?
Some employers offer a pension plan that lets you contribute a percentage of your salary. The employer then puts in money of their own and the combined funds are invested for growth.
This practice is believed to have been pioneered by the Hudson’s Bay Co. in the 1840s. It was an incentive to lure managers to remote trading posts.
Today less than 40% of employed Canadians have a pension plan at work. You are more likely to have one if you work for the public sector than if you are with a private company.
ARE THERE DIFFERENT TYPES OF EMPLOYER PENSION PLANS?
If you are fortunate to have a pension plan where you work, you should be aware of what type it is. Typically it will either be a Defined Benefit or Defined Contribution plan.
A Defined Benefit (DB) pension is where you receive a specific amount of payout that is guaranteed by employer, regardless of how their pension investment performs. Your defined benefit amount depends on how much is paid into the plan and your years of service with that employer.
Defined contribution (DC) pensions usually give you some choice about where money is invested, and relies on growth (returns) earned by this investment. There are no guarantees about what your payout will be when you either retire or leave that employer.
Employer pensions of either type depend in large part on the financial well being of the employer. If it ends up going bankrupt (like Nortel and other large companies have done), there may be less to retire on than expected.
WHAT HAPPENS IF I LEAVE THE EMPLOYER BEFORE I RETIRE?
Whether your employer offers a DB or DC plan, if you leave that organization before retirement age you may have five options regarding the funds that you have accumulated in your pension:
· Transfer the savings to your new employer’s plan
· Leave your pension savings in your employer’s plan
· Buy an annuity to get monthly income for life
· Transfer the money to a special retirement income fund
· Cash out some or all of your money
2. Retirement Benefits Provided To You By The Government
The Federal government joined the retirement income movement in 1927 with a plan that helped provinces ensure every Canadian over 70 would receive $20 a month. Today it offers three programs to help retirees modestly supplement their post-work income streams. You must apply directly for each of these programs when it is time to access your funds.
WHAT IS THE CPP/QPP ?
The Canada Pension Plan (CPP, or QPP as it is known in Quebec) is available to eligible workers at age 65, or up to five years sooner at a reduced rate. You pay into the program when working. It is intended to replace up to 25% of your full-time income upon retirement. However it is treated as taxable income. Also it can affect the amount you receive from an Employer Pension, private disability insurance or Worker’s Compensation.
WHAT IS OAS?
Old Age Security (OAS) is a modest retirement benefit available to all Canadians who have lived in this country for least 10 years. It begins at age 65, but can be “clawed back” if your other income sources exceed a certain limit.
WHAT IS GIS?
The Guaranteed Income Supplement (GIS) is for low income seniors on top of their OAS payments.
3. Your Own Savings That You Accumulate Over Time
If you are not part of an Employer Pension plan, you can take up to 18% of the income you earn each year and place it in an RRSP (Registered Retirement Savings Plan). This shelters your money from taxes until you withdraw it later in life. You will also receive a tax deduction for each year you contribute, all the way up to and including age 71.
At that point you can rollover your funds into a Registered Retirement Income Fund (RRIF). The capital and interest in a RRIF accumulates tax-free, but is subject to tax upon withdrawal.
Workers with Employer Pensions can only take limited advantage of RRSP contributions due to limitations on how much can be set aside tax-free until retirement.
Start Looking After Your Retirement Planning Today
Canada's retirement system has been ranked fourth in the world in a study that compares public and private pension systems in 11 leading countries. In spite of this, a poll conducted by a major bank found that 91% of Canadians have retirement worries. More troubling is that 20% are counting exclusively on either CPP (which provides only modest income), a lottery win, or an inheritance, instead of contributing to an RRSP.
The rule of thumb is that retirees need about 50 per cent of the income they earned while working. This figure assumes debts such as mortgages are all paid off and dependents have left the house.
That is why it is imperative to understand your options and start planning your retirement finances as soon as you are able to. Seek out independent advice from a qualified financial planner. Review your current situation and consider your future work intentions.
You may not be able to achieve the dream of Freedom 55. But you can certainly create a more comfortable, secure future for yourself and your loved ones if you try.