Registered Pensions Plans also known as Employer Pension Plans are set up on behalf of employees or a union in order to provide periodic payments in retirement. These plans are registered with the CRA and appropriate federal and provincial regulatory authorities.  These regulatory authorities define the minimum standard of benefit that must be provided by an RPP to the plan members. There are two types of employer pension plans:

• Defined Contribution Pension Plan
• Defined Benefit Plan

Defined Contribution Plan

In a Defined Contribution Pension Plan, also called “Money Purchase Plan”, the final retirement benefit is not known. A plan member would know how much they’re putting in the plan but don’t know how much they’ll be taking out in retirement. The final amount depends on several factors mentioned below

• Salary or wage levels and the resulting contributions made
• Investment selection
• Investment return
• Annuity and/or interest rates at the time the plan member retires

Amount of Contributions

The employee and the employer contributions into a defined contribution pension plan are usually determined as a percentage of earnings/salary. The total employee, employer, and voluntary contributions cannot exceed the lesser of the following amounts:

• 18% of the employee’s salary determined under the plan

or

• The MP limit for the year as determined by Income Tax Act 

Employer Contributions – Vesting 

Keep in mind that the employer’s contributions are a tax deductible expense and are not a taxable benefit to the employee. The employer contributions are kept separate from the employee contribution for investment purposes. When an employer contributes to the defined contribution pension plan, their contributions have to “vest” meaning that they’re not available until after a period of time, usually two years in most provinces. 

However, in most jurisdictions, defined benefit and defined contribution plans may be automatically vested which will entitle the plan member to receive both the contributions of the employer and their own.

Employee Contributions

Employee contributions are tax-deductible during the year they are made.  Employees are also responsible for making their own investment decisions regarding their contributions into the plan. Their investment decisions are based on their own risk appetite and investment objectives. The employer would usually provide investment options for the employees to choose from.

Leaving the Plan Before Retirement

Before an employee can reap in the benefits of the employer’s defined contribution pension plan, they must make sure that the benefits have been “vested”. Once vested, the contributions are locked and can only be used for retirement purposes.

Leaving Before Vesting Period

If a plan member leaves or quits the plan before the vesting period has ended, they would be refunded all their contributions plus interest.

Leaving After Vesting Period

If a plan member leaves or quits after the vesting period, they have three options

• Take the deferred pension at their “normal” retirement age (65)
• Transfer the pension amount to their new employer’s pension plan if applicable
• Transfer the amount to a locked-in account such as a Locked In Retirement Account (LIRA) or Locked In Registered Retirement Savings Plan (LRSP)

Locked In Pension

• There are two significant advantages to having your pension benefits locked-in:
  • You will have a regular income at retirement
  • Creditors cannot seize locked-in pension money.
• Keep in mind that the money can be accessed if certain exceptions are met 

Defined Contribution Pension Plan Options at Retirement

At retirement, members of a defined contribution pension plan must decide where to transfer the funds. The plan member would have to decide on how to take income from the accumulated assets. The choices are limited to locked in options below.

1. Transfer the funds to a locked-in Registered Retirement Income Fund
2. Transfer the funds to a Life Income Fund
3. Use the funds to purchase an annuity

The above options (#1 & #2) encourage the plan member to withdraw a minimum percentage each year according to their age. Unlike a RRIF, maximum annual withdrawal limits apply so that the plan member can’t deplete their savings.

An annuity would provide the plan member a guaranteed income stream for life (life annuity) or for a specific period of time. (e.g. up to age 90). The plan member would no longer have access to their capital and would no longer have to manage their own investments.