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

Posted by Nancy Hall-Chapman August 7, 2019 • 7 min read

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  • 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 Homebuyer’s Plan or 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 could be good idea to avoid having all your eggs in your pension basket and complement your pension with an RRSP. 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. However, you may still want to ask yourself whether your expected income may be enough to live the retirement you dream of; and if not, start tucking away money elsewhere, such as in an RRSP.

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 60% 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 other years. Her RRSP contribution room for 2019 works out as follows:

RRSP deduction limit for 2018 $21,400
Plus: 18% of her 2018 earned income of $62,500
(up to a max. of $26,500)
Minus: 2018 pension adjustment (PA) 8,500
Available contribution room for 2019 24,150