What Should You Know About Your Workplace Pension Plan?
There are several types of plans, also called pension funds. Pension plans vary from one workplace to another. If you have one, it is therefore important to be informed to understand it well. The first thing to do if you are a plan member is to consult the statement you receive. It is the tool that helps you understand what to expect when you retire and to plan accordingly.
Defined-benefit plan
You could be a member of a
defined-benefit plan. Under that type of plan, the amount of the retirement pension you will receive is set in advance. In most cases, the calculation is made according to a formula based on your salary and years of service. Therefore, you know exactly how much you will receive when you retire. In general, in a defined-benefit plan, your employer assumes the risks related to a variation in the plan's investments. This means that if the investments yield less than expected, it does not affect your retirement pension.
What should you verify if you have access to that type of plan?
In addition to being informed on the pension that you could obtain when you retire, verify whether it is possible to buy back the parental leave and what will happen if you change jobs.
Parental leave
Most of the time, it is possible to buy back a parental leave, but what does it mean? When you are on parental leave, you no longer contribute to your pension plan. Under certain plans, the period during which you no longer contribute reduces the retirement pension that you will receive later.
Therefore, if you want to have the maximum possible, you can make contributions to the pension plan to buy back those contributions. Usually, the sooner you buy back the contributions after your leave, the lesser they will cost. You could try to plan the buy-back by accumulating the required amount to buy back the contributions when you return to work. It is a good investment for later, and it might even give you a tax refund!
Changing jobs
If you change jobs, you will probably have to choose between keeping your benefits accrued under the pension plan or transferring them:
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Keeping your accrued benefits means that you are leaving your contributions, those from your employer and accrued interest under the pension plan to have a retirement pension later.
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Transferring your accrued benefits means applying for the transfer of amounts accrued in a locked-in retirement account (LIRA) and managing the investments that you made with those amounts, yourself. But that money can only be used to give you a retirement income.
Both options provide pros and cons. Be well informed to make the best decision for you.
Defined-contribution plan
You might have access to a defined-contribution plan. This is a plan under which contributions are set in advance, but retirement income is not known in advance. Therefore, you know how much you are paying, but you do not know how much you will be receiving. Your income will depend on various factors, like the amounts that were accrued and the return on investments. If you have access to that type of plan, verify what happens if you are absent, for example, for a parental or sick leave, and what your options are if you change jobs.
Group
RRSP or group
TFSA
Your employer could also offer you a
group
RRSP or
group
TFSA. In that case, it works the same way as individual RRSPs and TFSAs, but group plans are governed by a contract that links your employer to you. The management fees are normally a lot lower in those plans than in individual plans. When you retire, small savings each year on management fees can represent several thousands of dollars.
Find out about the contributions that can be made, the investments that you can make in your plan, if you can withdraw amounts before you retire and what your options are if you change jobs.
Voluntary retirement savings plan
Your employer could also offer you a
voluntary retirement savings plan (VRSP). If you choose to be a member of a
VRSP, you determine your contribution. However, your employer is not required to contribute any money to your plan. You must therefore take this into account in your planning.
Contributing to a pension plan
If your employer does not provide a pension plan, you can ask your employer to set one up. Do not hesitate to ask your employer to do so.
In all cases, do not hesitate to ask questions about your pension plan and to get advice to be sure to make informed decisions. A pension plan is really beneficial.