10.2.6 Employer pension plans

From: Financial Consumer Agency of Canada

In addition to the Canada Pension Plan or the Québec Pension Plan, some Canadians have an employer-sponsored pension plan as part of the total pay package offered by the company. These plans can be a great help in saving for retirement.

  • They help you save money regularly from your pay.
  • Your employer contributes all or some of the money into your plan.
  • You won't have to pay taxes on the money your investments make in these plans until you retire and use the money.

If your employer offers a pension or retirement savings plan, look into joining. It's a great way to get started on saving for retirement.

Defined contribution and defined benefit pension plans

Pension plans are generally one of two types: a defined contribution plan or a defined benefit plan.

Defined contribution pensions

A defined contribution pension plan establishes a set amount that you and your company will contribute to your plan each year. The amount is based on how much you make. Defined contribution plans don't guarantee what you will get when you retire; that depends on how well the plan is managed. You can work with a financial professional or a pension advisor to determine how much you will likely receive each year.

Defined contribution plans require that you collapse the plan by the end of the year you turn 71. At that point, you can withdraw the funds and pay tax on the income, transfer the assets to a registered retirement income fund (RRIF) or purchase an annuity. (For more information on RRIFs and annuities, see the section titled Retirement and pensions: Savings for retirement).

Defined benefit pensions

A defined benefit pension plan promises to pay you a set income when you retire. A formula determines how much you will get. It is often based on your income when you were working and the number of years you have worked.

The formula that is used to calculate the defined benefit is important.

Example: Winnie and Winston both worked for private companies for 40 years, and both earned $70,000 in their final year. Both of their companies calculated the defined benefit based on 1.2 percent of the average salary per year of service. The difference is that Winnie's company used the average of her best three years of earnings ($65,000), and Winston's company used the average of his last 10 years of earnings ($60,000).

Here's how their defined benefits worked out:

Winnie: $65,000 X 1.2% X 40 years = $31,200 per year

Winston: $60,000 X 1.2% X 40 years = $28,800 per year

Winnie and Winston have a similar work history but different pensions.
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