Pensions, savings and RRSPs: what's your retirement plan?

October 28, 2014

When planning for retirement, it's vital to weigh all options including pension, savings and RRSP plans. But what other choices are there to prepare for your golden years?
Retirement savings, pension plans, annuity plans and retirement plans are all synonymous. They are, according to the Department of the Secretary of State of Canada, "an arrangement, the main purpose of which is to provide periodic payments to individuals after their retirement in respect to services they rendered to employers or in respect of their tenure as holders of offices."

Simply put, it is a plan set up by your employer, in which you contribute to put money aside for your old age. This is a private pension plan. There are two types of pension plans: defined contribution plans and defined benefit plans.

Pensions, savings and RRSPs: what's your retirement plan?

Defined contribution plan

In this case, both you and your employer contribute to the plan, and the value of the pension at the time of retirement depends on the return on investment. Though you have more control with this type of plan, it would be best for you to have at least some basic investment knowledge or seek investment advice.

Defined benefit plan

In the case of defined benefit plan, the employer pays you a predetermined amount when you retire. You may or may not have to pay into it, depending on the plan. The disadvantage of this type of plan is that you may risk losing everything if your employer experiences financial difficulties, or has mismanaged the pension fund.

If a retirement plan is not provided by your employer, the government has programs set up to help you save.

Public pension plans

When you retire, you will be entitled to various public pension plans. In Canada, they are:

  • The Old Age Security (for all Canadians, and you do not have to make contributions);
  • The Canada Pension Plan (for residents outside of Quebec who contributed);
  • The Quebec Pension Plan (for retired Quebec residents who paid into it);
  • Other provincial and territorial pension plans.

Remember, these pension incomes are taxable!

Registered Retirement Savings Plans (RRSP)

These are registered retirement savings plans. You must open an RRSP account in a bank, credit union, a trust, or savings and loan company. Participation in these plans is 100% voluntary, but if you start contributing to them while you are young enough, they will sufficiently mature to be your main source of income after retirement.

There is a maximum amount you can contribute each year, and these amounts are tax deductible. Furthermore, as the money in your RRSP account grows, it is tax sheltered until you withdraw it. You can withdraw it at any time or allow it to continue to grow until you retire.

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