Registered Pension Plans (RPPs) are established by employers to help employees with retirement savings.
According to Statistics Canada, less than 40 per cent of paid workers have an employer-sponsored registered pension plan. The remaining 60 per cent either didn’t have access to one or simply weren’t participating. Some companies have an opt-out clause where the employee can choose whether to contribute to the RPP, other companies have mandatory participation.
If you’re fortunate enough to have access to a plan, don’t opt out. With most company-sponsored pension plans, the employer kicks in free money or free benefits. So, if you contribute four per cent of your salary, and your employer matches it 100 per cent, it will add an additional four per cent. Whatever the specific matching program is, it makes sense to maximize your portion of the contributions into the plan for two reasons: you contribute with pre-tax dollars and you get free money from your employer. Don’t turn your back on free money. You can usually sign up within the first year of your employment.
There are two main types of RPPs: Defined contribution plans and defined benefit plans. The most commonly issued plan in Canada is the defined contribution plan. With this plan, the employer pays a predetermined amount of money into your pension, but you get to choose, from a variety of investment options, where it gets allocated. Your employer is not responsible for your pension plan’s performance because you pick the contents. Similar to an investment plan, your pension benefits are whatever you’ve accumulated in contributions and investment returns.
A minority of Canadians enjoy a defined benefit plan. With this plan, you receive a defined or pre-set payout each month once retirement hits. The actual benefit received through a defined benefit plan is based on a formula that is applied to your income nearing the end of your employment, when you typically earn the most money. The details of the formula are located in the fine print of the plan. In this case, the employer shoulders all the risk associated with managing and funding the plan. So even if the markets perform poorly, making the plan more costly to provide, the employer will still pay the same amount of pension promised to the employee.
In either the defined contribution or defined benefit scenarios, if you leave your job, make arrangements to transfer your pension to your new employer and/or a financial adviser. If you’re self-employed, get help from an adviser and set up an Individual Pension Plan (IPP), which has tremendous tax advantages and retirement solutions.
Take a serious look at your company’s pension plan because it can be worth hundreds of thousands of dollars by the time you retire.