RRSP & Pension Plans
Different Pension Plans come with different features and provide various benefits with different structure. There are number of pension plans which people adhere to, but three most known and common pension plans are Defined Contribution (Money Purchase) plan, Defined Benefit Plan and Hybrid/combination plans.
Defines Benefit Pension Plans:
These pension plans are designed in such a way that you get a specific amount of financial benefits at regular intervals of time after retirement. The quantum of financial benefits that you will be provided with after retirement depends upon the period of your service and the premium you have agreed upon to pay during the period of employment. You will be made available annual information of your account at regular intervals of time. Everything right from the premium that you are required to pay to the financial benefits that you will receive is given in detail in the pension plan contract.
Following are the various formulae that are used to calculate the benefits that you will receive on maturity of plan:
• Flat Benefit Formula: Flat benefit defines pension benefits based upon the years of service and a fixed amount as specified in the contract. A fixed amount will be paid to you for a period of time which is calculated on the basis of period of service.
• Best Average Earning Formula: The rate of pension is decided upon the basis of salary. A fixed percentage rate is applied on your final or average earnings after each year of service and pension amount is derived at.
• Career Average Earning Formula: Under this, the pension benefits are calculated on the basis of fixed percentage of your annual earnings.
Defined Contribution Pension Plans
Under Defined contribution pension plans, a fixed amount of money is contributed to your account by you or on your behalf. The money so contributed is invested and at the end of your period of service the money so contributed along with interest earned is used to buy pension. The amount of pension will be based upon the return of investment. The annuity factor also has a role to play in deciding the pension amount. Defined contribution pension plans differ from one another. In some cases, employees are asked to choose their own investment plans where in some other cases, the investment decisions are left to those who regulate the pension plans.
Both the above defined pension plans are registered pension plans. However, there are some un-registered pension plans like Deferred Profit Sharing Plan (set up by an employer and contributes a part of its profit to it for the benefit of employee), Employee Stock Option Plan (employees are given an option to purchase the shares of the company at discount), Individual pension Plan (helps in claiming tax exemptions), etc. which are made available to employees
A group RRSP centralizes routine administration, but each employee maintains control over his or her own account and investments. A structured RRSP adds a way to allocate employer and employee contributions in separate accounts within the plan. Both make it possible for employers to help employees reach their retirement savings goals. With a group or structured RRSP, employees benefit from a convenient, disciplined savings program. They build a nest egg for retirement through payroll deductions and save taxes with every pay cheque. In addition, they get:
• earlier investment and dollar cost averaging
• group buying power, which may mean higher interest rates, advantageous investment management fees and lower investment minimums
• opportunity to withdraw through the Home Buyers’ Plan and Lifelong Learning Plan (depending on plan rules)
• flexibility at termination and retirement, with immediate vesting and no locking-in rules
• potential to bypass probate if they name a beneficiary for the death benefit
• protection from creditors in certain circumstances.