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Company Pension Contributions

Pensions come in mainly 2 types: Defined Benefit pension plans (DB Plans) and Defined Contribution pension plans (DC plans). The word “contributions” in pension language refers to how much money you are paying into the pension plan while you are working. The word “benefits” refers to the money being paid out of the pension plan once you retire. A defined benefit pension plan is where the payouts (or benefits) that you receive in retirement are “defined” or fixed. For a defined contribution pension plan, the money you are paying into the pension plan is “defined” or fixed. If one element is fixed, the other element can change over time to allow for unpredictable circumstances.

How do you know what type of pension plan that you have? For a DB plan, you will not have any decisions to make with respect to how the pension money is invested. The rate of return on the investments is provided by the plan sponsor, which is based on an actuarial study which the pension plan conducts about every few years. There would be a retirement calculator that would predict your retirement payout for a future date.

For a DC plan, the employer would provide you with a list of company sponsored investment products, and you would choose from the list. There would not be a calculator that can predict a payout because it would depend on how well your investments perform and the investment products that you choose within your DC pension account. If there is a retirement calculator, you would have to assume an average rate of return on your pension investments up until your retirement date.

What does this have to do with my budget? Depending on the type of pension plan you have, there may be decisions on how much money will be contributed from your pay cheque. For a DB plan, there is no choice. The contributions are set each year by the employer and you would have to account for them. For a DC plan, you may have a mandatory component and an optional component to how much you contribute. There may also be an additional component called an “employer match”, where your employer matches your additional pension contributions up to a maximum percentage.

Note that contributions have 2 components for both types of plans: The employer portion and the employee portion. The employer portion is not part of your salary or your budget and remains in the background as long as you are an active member of the pension plan which means you are either actively working or making contributions as if you are working. The only time the employer contribution would be of interest to your budget is for the calculation of your RRSP contribution room or if you are leaving the employer and want to find out how much pension you will be receiving. The employee portion is coming from your salary and would be a deduction similar to CPP and EI.

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