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2 main types of pension plan

​​There are 2 main types of pension plans: defined benefit (DB) and defined contribution (DC).

1. Defined benefit plan

5 things to know about DB plans

  1. A DB pension plan promises to pay you a certain amount of retirement income for life.
  2. The amount of your pension is based on a formula that usually takes into account your earnings and years of service with your employer.
  3. In most plans, both you and your employer contribute.
  4. Your employer is responsible for investing the contributions to ensure there’s enough money to pay the future pensions for all plan members.
  5. If there’s a shortfall in the money needed, your employer must pay the difference.
Sample formula – 2% x your average salary in the past 5 years x number of years you were a plan member.
​Average salary ​$50,000
Benefit percentage 2%
​Years of plan membership 30
Formula calculation ​$50,000 x 2% x 30
Annual pension $30,000

2. Defined contribution plan

5 things to know about DC plans

  1. With a DC plan, contributions are guaranteed, but retirement income is not.
  2. Usually, both you and your employer contribute to the plan. Your employer may match some of the contributions you make.
  3. You are responsible for investing all contributions to grow your savings. In this way, the plan is similar to an RRSP.
  4. The amount available for your retirement depends on the total contributions made to your account and the investment returns this money earned.
  5. At retirement, you use the money in your account to generate retirement income. You can do this by:
    • buying an annuity from an insurance company, or
    • transferring your savings to a locked-in retirement income fund (LRIF) or similar income fund designed specifically for pension savings.

New type of DC plan – the PRPP

Effective January 1, 2013, the federal government introduced a new type of DC plan, called a Pooled Registered Pension Plan (PRPP). These plans are offered by financial institutions on behalf of employers. Multiple employers – and the self-employed – can participate in a single, cost-effective plan.

The PRPP is designed mainly for employed and self-employed individuals who would not otherwise have access to a workplace pension plan.

Currently, PRPPs are only available to people who are employed or self-employed:

  • in the Northwest Territories, Nunavut or Yukon;
  • in a federally regulated business or industry (like banking or transportation) where the employer chooses to participate in a PRPP; or
  • who live in a province that has put PRPP laws into place and the employer is participating in a PRPP.

Quebec’s version of the PRPP – the Voluntary Retirement Savings Plan (VRSP) – takes effect on July 1, 2014. Two other provinces (Alberta and Saskatchewan) have passed PPRP laws, but they have not finalized a date for the introduction of PRPPs. Ontario continues to study PRPPs but has not introduced a law that permits them.

 

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