If you have a pension plan, do you need an RRSP?

• Canadians with a company pension plan may also have enough contribution room for an RRSP
• If you do have contribution room, having an RRSP provides you with a number of other benefits (e.g., money you can withdraw for the Home Buyers’ Plan or the Lifelong Learning Plan)
• Also consider the option of income splitting with a Spousal RRSP

According to the results of a Statistics Canada survey from a few years ago, fewer than 40% Canadians have work-based pension plans. If you do, consider yourself one of the lucky ones. This puts you in a good place for your retirement—but does it mean that your future financial security is assured?

Depending on the type and size of your pension plan (plus other factors), there are still some reasons why you might want to consider opening an RRSP to save more for your retirement.

Consider your type of pension plan

If you’re in a company pension plan, it’s likely to be either a defined contribution or defined benefit plan.

With a defined contribution plan, you contribute a fixed percentage of your total income to your pension. Often this amount is matched by your employer. You’re guaranteed how the funds enter the pension, but not how much your retirement income will be when the pension is paid out—that depends on the performance of the investments in the pension account. On the other hand, with a defined benefit plan, you’re guaranteed a specified payout of income when your pension matures, which is reported each year on your annual pension statement.

For a defined contribution plan, there’s less certainty as to what your pension income may be in retirement, so it may be a good idea to diversify your retirement savings by complementing your pension with an RRSP, rather than having all your retirement savings solely in your company pension. If you’re in a defined benefit plan, you have the advantage of knowing now what your pension income will be when you retire, which can help you plan better for your future. Supplementing your defined benefit plan with an RRSP may also help you achieve the expected income you need to live the retirement you dream of.

Also, consider the unfortunate reality that some companies may not be in as stable a financial position as they seem to be. Think of the high-profile Nortel bankruptcy in 2009 where the company pension plan took a big hit and the Sears liquidation in 2018 where the pension plan was underfunded by nearly $270 million. Shoring up your financial future by opening an RRSP may be a wise idea.

Check your contribution room—you may have more than you think

If you have a company pension plan, an amount called the Pension Adjustment (PA) is deducted from your RRSP contribution limit. The PA is the estimated value of the pension benefits an individual has earned during the year and is deducted for anyone who is on a work-based pension plan. The PA was established by the Canada Revenue Agency to level the playing field for pensioned and non-pensioned Canadians alike, so the higher the value of your pension the higher your PA amount will be.

If you are in a defined contribution plan, where you contribute a fixed percentage of your total income to your pension—which may be matched by your employer—your PA will be the amount you contributed plus the matched amount. For a defined benefit pension plan, your PA is calculated as: [(9 X your annual accrued benefit) – 600]

You can find out your PA amount by going to box 52 of your T4. For more information, see the Government of Canada.

Having a generous workplace pension plan with a relatively high PA doesn’t mean you don’t have RRSP contribution room—especially if you’ve never opened an RRSP before. Take the case of Monica, a primary school teacher in Ontario. Like most Canadian teachers, she enjoys a substantial (defined benefit) pension plan and can look forward to a retirement income that’s a significant percentage of her income during her highest earning years.

Although her PA amount is high, she’s never opened an RRSP, so she has carryover room from taxable income she earned prior to becoming a teacher. She checked with the CRA and her current available RRSP contribution room is $24,150.

If Monica isn’t aware she has this amount of contribution room, she may be overlooking an opportunity to add to her retirement savings, along with her pension.

Consider your other financial commitments

During your working years you likely have other financial considerations besides saving for retirement, such as saving to buy a house, paying your mortgage, or saving for your kids’ education with an RESP. Retirement may be the last thing on your mind and you may be thinking, “What’s the point of having an RRSP? I need the money for other things right now so I don’t want to lock it in somewhere. Besides, my company pension plan will take care of my retirement future…”

But think again. Did you know you can withdraw up to $35,000 from your RRSP tax-free to contribute to the purchase of your first home? You have up to 15 years to re-contribute what you’ve withdrawn without a tax penalty. And here’s another perk of having an RRSP: if you or your partner/spouse decide to go back to school full-time, you can withdraw $20,000 tax-free from your RRSP to finance your education—up to $10,000 in one year. Both of these—the Home Buyers’ Plan and the Lifelong Learning Plan—are subject to certain conditions.

So, even with your other financial commitments, with a little planning it could be possible for you to contribute regularly to an RRSP throughout the year—which is the best way to do it. That way, your money is tax-sheltered longer and compounding kicks in that much sooner—meaning, the more often you contribute to your RRSP, the sooner that money can be reinvested to generate even greater earnings over time.

What about investing in a TFSA or non-registered account instead of an RRSP?

Since your pension contributions are locked-in until your retirement, you may be considering the flexibility of a TFSA or non-registered account rather than locking in more of your money with an RRSP. 

It’s true that with a TFSA, like an RRSP, you can earn capital gains and dividends tax-free, and, unlike an RRSP, you can withdraw your funds at any time without being taxed. That said, an advantage of contributing to an RRSP is being able to deduct your contribution as taxable income and lower your taxes—or maybe get a refund at tax time. That could turn into less money spent on paying the tax-man during your working years and more to reinvest or to pay down some of your current expenses.

Of course, both RRSPs and TFSAs allow you to tax-shelter your investments as they grow, unlike a non-registered account. Each has their advantages and limitations and it’s good to understand what those are when planning your retirement strategy.

How about your spouse’s income?

It’s always a good idea to look at the bigger picture of you and your spouse’s combined income and retirement savings plans when planning for your financial future.

For example, Monica’s partner Jeremy, who works as a contract technical writer, earns $30,000 annually (about half of Monica’s annual income), is not in a work-based pension plan, and does not contribute to an RRSP. When Jeremy retires, his combined Canada Pension Plan (CPP) and Old Age Security (OAS) will not replace 100% of his pre-retirement income.

It may make sense for Monica and Jeremy to equalize their incomes by having Monica contribute to a Spousal RRSP in Jeremy’s name. Then, at retirement time, since Monica has the higher income and is in a higher tax bracket she can split some of that income with Jeremy so that, overall, they pay less tax.

By doing income-splitting with a Spousal RRSP, you can supplement your work-based pension in a way that benefits both you and your spouse for your future.

It’s great that you’re one of the enviable few who can look forward to pension income in your retirement, but don’t overlook the possibility of also contributing to an RRSP if you have the room. Not only is an RRSP a great strategy for paying less tax during your working years, but it’s an important way to help you save money and retire that much wealthier.

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