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7 Best Pension Plans In Canada 2024: Get Ready to Retire

7 Best Pension Plans In Canada 2024: Get Ready to Retire

Are you planning for your golden years? Having a pension plan in place allows you to earn retirement income and live comfortably throughout your retirement.

21.8% of the population is approaching retirement age (ages 55 to 64), according to Statistics Canada.

If you’re in this age group or younger, then it’s critical to start planning for your retirement. The earlier you start planning, the more comfortably you can position yourself.

Below, I’ll outline the best pension plans in Canada and explain what differentiates them, so you can determine which ones best fit your situation.

Earn Retirement Income With Pension Plans

Investing in a pension plan throughout your career can help ensure that you’ll have a steady, reliable income once it’s time for you to retire. This will not only allow you to live more comfortably, but it will also reduce the financial burden on your children and extended family.

As with many things in life – the earlier you start, the better.

Most pension plans involve taking a small amount out of your paycheques and putting it towards an investment fund. Over time, the amount in your pension plan grows from your contributions and investment returns.

Some pension plan contributions can also help you claim a tax deduction, reducing your tax liability for the year.

There are several different pension plans available to Canadians, including:

  • Canada Pension Plan (CPP)
  • Defined Benefit Pension Plan
  • Defined Contribution Pension Plan
  • Registered Retirement Savings Plan (RRSP)
  • Group RRSPs
  • Tax-Free Savings Account (TFSA)
  • Old Age Security (OAS)

The government issues public pension plans like the Canada Pension Plan and Old Age Security. Other pension plans are sponsored by employers, such as the Defined Benefit Pension Plan, the Defined Contribution Pension Plan, and employer-sponsored group RRSPs.

However, you may also set up your own pension plan in the form of an RRSP or TFSA. You can enroll in one (or both) of these programs through a financial institution, contribute, and even self-direct the investment fund.

Pension Plans In Canada: Listed

Now that you know more about how pension plans work in Canada, I’ll give you a brief outline of the available pension plans that Canadian retirees can take advantage of.

1. Canada Pension Plan (CPP Retirement Pension)

Canada Pension Plan (CPP Retirement Pension)
  • Learn More: Canada.ca
  • Brief: The CPP is a mandatory public pension plan that provides retirement, disability, and survivor benefits to eligible Canadians.

The Canada Pension Plan (CPP) is a public pension plan that all working Canadians must pay into during their career. CPP payments provide income replacement for those who become disabled or pass away.

It’s funded by contributions from employees, employers, and the self-employed. Almost all working Canadians are part of this, excluding those in Quebec who contribute to the Quebec Pension Plan.

Your contributions to the CPP are based on your earnings on each paycheque. The CPP contribution rate in 2023 is 5.95%. Employers and employees can contribute up to $3,754.45 to an individuals CPP, and the self-employed can contribute up to $7,508.90 for the year.

How Much Can I Get From The CPP?

The amount you can get from the CPP depends on various factors, including

  • How much you’ve earned in your career
  • The age you retire
  • Total contributions made to the CPP

If you start receiving it at age 65 and have contributed the maximum amount to the CPP for at least 39 years, then the maximum CPP retirement benefit you can receive in 2023 is $1,203.75 per month.

However, the average CPP retirement benefit paid in 2022 was $717.15 per month.

Lower-income seniors may also be able to take advantage of the Guaranteed Income Supplement (GIS), which provides a fixed monthly payment issued alongside their CPP benefit.

Deferring CPP And Early CPP

While most Canadians start receiving CPP at age 65, you can start receiving CPP retirement benefits as early as age 60 or may choose to defer your CPP benefits to age 70.

If you opt to receive your benefits at age 60 (or anytime before age 65), then your CPP payments will be reduced by 0.6% each month or 7.2% per year.

On the other hand, if you delay your benefits past age 65, your benefits will be increased by 0.7% per month or 8.4% per year. Deferring your benefits comes with a greater reward than the loss incurred by requesting your benefits before age 65.

2. Defined Benefit Pension Plan

Defined Benefit Pension Plan
  • Learn More: Canada.ca
  • Brief: An employer-sponsored plan that provides a guaranteed retirement benefit based on a formula that factors your salary and years of service.

A defined benefit pension plan is an employer-sponsored pension plan that provides a guaranteed retirement benefit to eligible employees of that company.

This type of company pension plan is typically offered by larger employers such as governments, unions, and major corporations.

The amount of the retirement benefit is determined by a formula that accounts for the employee’s earnings history, how long they’ve worked for the company and other factors such as their age and retirement date.

The employer is responsible for funding the plan and assumes all investment risks.

The upside of a defined benefit plan is that they provide a predictable retirement income guaranteed by the employer.

However, they are also complex and expensive to administer, which is why most employers have shifted to defined contribution pension plans in recent years (see below).

What Happens If You Leave The Company?

The tricky thing about defined benefit pension plans is that they can’t be transferred to a new employer, as you might do with an RRSP. If you leave the company responsible for managing the pension plan, you’ll have three options:

  • Leave the pension benefit in the plan: You may be able to leave your pension benefit in the plan until you reach the plan’s retirement age and receive monthly benefits based on the amount you contributed.
  • Purchase an annuity: You can use the value of your pension benefit to purchase an annuity from an insurance company and receive payments for life. These payments may be fixed or variable, depending on your annuity contract terms.
  • Transfer the pension benefit to a Locked-In Retirement Account (LIRA): A LIRA is a type of registered retirement savings account that holds pension benefits that cannot be withdrawn as cash. The LIRA can then be managed by a financial institution and grow tax-deferred until retirement.

3. Defined Contribution Pension Plan

Defined Contribution Pension Plan
  • Learn More: Canada.ca
  • Brief: An employer-sponsored plan that allows employees to contribute a portion of their salary towards retirement savings and investment.

Unlike defined benefit plans, defined contribution pension plans allow employees to decide how much they want to contribute to their pension plan each year. The employer will then match these contributions.

Like defined benefit plans, a defined contribution plan is sponsored and managed by the employer. However, there’s more room for flexibility, and many defined contribution plans give employees a say in where their funds are invested.

The main difference between the two plans is the level of certainty and risk associated with the retirement benefit.

In a defined contribution pension plan, the employee has more control over their investments and the level of contributions made, but the retirement benefit is not guaranteed.

In a defined benefit plan, the retirement benefit is guaranteed. However, the employee has less control over the investments and contributions made to the plan.

4. Registered Retirement Savings Plan (RRSP)

Registered Retirement Savings Plan (RRSP)
  • Learn More: Canada.ca
  • Brief: Tax-advantaged accounts that allow you to save for retirement by contributing pre-tax income and earning tax-free investment returns until withdrawal.

Registered Retirement Savings Plans (RRSPs) help individuals save for retirement by allowing their investments to grow tax-deferred.

RRSP contributions are tax-deductible, which means they reduce your taxable income for the year and offer an immediate tax benefit. Instead, you’ll pay standard income taxes when you begin withdrawing from your RRSP in retirement.

The money you contribute to an RRSP grows tax-free inside the plan, meaning you won’t have to pay tax on any investment income or capital gains earned on the investments within the plan until you withdraw the funds in retirement.

RRSPs can either be self-directed or may be managed by your financial institution.

What Is The Maximum RRSP Contribution Room?

Each year, the CRA states the maximum RRSP contribution room. Unused contributions from previous years can be rolled over into future years. In 2023, the maximum contribution is $30,780.

5. Group Registered Retirement Savings Plan (Group RRSP)

Group Registered Retirement Savings Plan (Group RRSP)
  • Learn More: Canada.ca
  • Brief: RRSPs sponsored by employers for their employees.

A group retirement savings plan is very similar to a traditional RRSP.

The main advantage is that investment fees are usually lower, as you’re enrolled in a group plan with the rest of your company. Over time, these investment fees can add up, and you can save a fair amount by enrolling in your company’s group RRSP.

Many employers may also offer to match a higher percentage of your contributions than individual RRSPs.

If you leave your employer, you can transfer your contributions to a personal RRSP or accept a cash withdrawal (although this comes with tax penalties), which makes it a lot simpler than a defined benefit pension plan.

The main disadvantage of a group RRSP is that you won’t have any control over how your contributions are invested. Your employer and the institution holding the group RRSP are responsible for directing your investment.

6. Tax-Free Savings Account (TFSA)

Tax-Free Savings Account (TFSA)
  • Learn More: Canada.ca
  • Brief: Registered savings accounts that allow individuals to earn tax-free investment income and withdraw funds without paying tax.

The Canadian government launched the TFSA program in 2009 to incentivize Canadians to save more money. As long as you’re 18 years old and a legal resident of Canada, you can open up a TFSA account and start saving.

To ensure the system remains fair for everybody, there are annual and lifetime contribution limits determined by the year in which you first became eligible for the program.

Unlike RRSP contributions, which are tax-deferred and tax-deductible, TFSA contributions are made post-tax. Because of this, you don’t have to pay taxes on profits realized within a TFSA account. Since TFSAs can be used as investment vehicles, you can build substantial savings by taking advantage of the tax-free growth.

7. Old Age Security (OAS)

Old Age Security (OAS)
  • Learn More: Canada.ca
  • Brief: A federal government-funded pension program that provides a basic level of retirement income to eligible Canadians aged 65 and older.

Unlike the CPP, which is determined by your CPP contributions and retirement age, Old Age Security is a fixed amount issued to all eligible Canadians over age 65. The amount of your OAS payment is primarily determined by how many years you’ve resided in Canada, and the maximum monthly amount is $756.32.

In most cases, your OAS payments will be automatically issued the year you turn 65. However, you may have to contact Service Canada to enroll.

Start Planning For Retirement Now

From contributing to company pension plans to a self-directed RRSP or TFSA, it’s best to start preparing for retirement now.

The more you invest at a younger age, the more you’ll be able to live on when you retire. If you’re lucky, you may even be able to retire early.

Retirement planning isn’t something you should wait for.

Click here to read my guide on how to retire at 50 in Canada!

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