Private Pension Plans: What are you entitled to?
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As a member of a private pension plan, you'll be provided with information on your plan and the benefits under it in a statement of benefits, a plan summary, or other literature. If you need additional information, contact your plan administrator, which could be a retirement committee, your employer, your union, a financial institution, or another authorized body. Your documentation should contain the name of your contact person and how to reach him or her.
Types of private pension plans:
- Supplemental pension plan (SPP)
- Top-hat plan
- Group and individual registered retirement savings plan (RRSP)
- Deferred profit sharing plan (DPSP)
- Employees profit sharing plan (EPSP)
- Retirement compensation arrangement
The rules that apply to private pension plans can vary depending on the plan and the worker. What applies to one plan does not necessarily apply to another, and what applies to you does not necessarily apply to someone else, even if you have comparable salaries and years of service.
Your Plan and You
To plan your retirement, you need to know the following information:
- What you will pay in taxes on your retirement income?
- Depending on your situation, you may be eligible for a pension tax credit. Some restrictions apply.
- You and your spouse may be able to reduce your taxes by splitting certain types of retirement income on your income tax returns. Some restrictions apply.
- At what age can you receive a retirement pension?
- As a general rule, a retirement pension is payable when you reach the normal retirement age set out in the plan (usually 65). But it may be possible to begin receiving a pension earlier, such as at age 55. It may also be possible to start late, but not after 71 in the case of plans subject to that age limit within the meaning of the Income Tax Act. The age at which you decide to begin drawing a retirement pension could have an impact on the amount of each payment.
- Instead of receiving your pension, you may have the option of transferring the value of your accumulated benefits to a locked-in retirement account (LIRA), a life income fund (LIF), or other eligible vehicle, usually before the age of 55. Some restrictions apply.
- How much you'll receive directly from a defined benefit plan or similar plan?
- The amount payable is usually calculated as a percentage of your salary or as a fixed rate, depending on your number of years of credited service under the plan.
- How much you'll receive from savings accumulated in a defined contribution SPP, a RRSP, or other capital accumulation plan?
- These plans are somewhat like a savings account. They are not set up to pay a retirement pension as such. However, you can use the funds as retirement income through a life annuity contract, a life income fund (LIF), a registered retirement income fund (RRIF), or other investment vehicle. The amount payable cannot be determined until you convert your savings into retirement income. Simulation tools can help you estimate your retirement income based on the savings you expect to accumulate and your planned age of retirement.
- Capital accumulation plans carry a certain risk associated with fluctuations in the return on the investments you choose. You are also at risk of low interest rates when you convert your savings into retirement income. Your retirement income will be highest if the return on investment is high and the interest rates are also high when you purchase your life annuity or transfer your savings into a life income fund or the equivalent.
- Is your pension indexed to the cost of living?
- If your pension is not indexed, it will never increase after you retire, which means that your purchasing power will fall as the years go by. For example, $1,000 a month would be enough to pay your rent today, but will it be enough in 15 years?
- If your pension is indexed, find out how much your payments will increase based on the consumer price index (CPI) or another index or rate (e.g., 1%) and how often (quarterly, annually, biennially, etc.). A pension plan that is indexed to the cost of living does not necessarily provide total protection against inflation. It might not be indexed at 100% of the CPI, but only 50% or CPI less 3% with a 0% minimum, which could mean a minimal increase or none at all in some years. As a general rule, a pension will never drop due to indexing.
- Some plans may provide for indexing on an ad hoc basis. If this is the case, it is impossible to predict how much your payments will increase and when. For financial planning purposes, it is best to assume that your retirement income will not change.
- Some plans may index your retirement income before and after you begin receiving payments. The resulting amount may vary greatly depending on whether indexation is applied before or after your pension begins.
- How will your retirement income be reduced in the event of early retirement?
- If you start receiving your retirement income earlier than planned, it will have to be paid over a longer period. This may have the effect of decreasing the amount of your payments.
- The reduction may be a set amount (e.g., 0.5% or 0.25% reduction for each month early), or an actuarial equivalence. As a general rule, early retirement pensions are calculated so the total value is at least equal to that of the normal retirement pension.
- For example, if your pension provides for $1,000 per month payable beginning at age 65 and you decide to begin drawing payment at age 60, you'll receive $700 a month for the rest of your life if the applicable reduction is 0,5% per month early.
- How will your retirement income be adjusted if you continue to work for the same employer after the normal retirement age?
- If you begin receiving your pension later than planned (usually age 65), it will be paid out over a shorter period. Your payments will therefore be higher than originally expected.
- As a general rule, the amount of a postponed pension is calculated so that its value is at least equal to the value of the normal retirement pension.
- For example, if your pension provides for $1,000 per month payable beginning at age 65 and you decide to work until age 68, you may receive $1,290 per month once you retire. This is an example only. Actual amounts are based on actuarial assumptions, particularly interest rate assumptions.
- Will your pension be integrated with pensions under the Québec Pension Plan (QPP) and the Canada Pension Plan (CPP)?
- In order to avoid overestimating your retirement income, it is important to find out whether your pension will be reduced at a certain age by taking into account a pension you receive under the QPP or CPP. Pensions are integrated to keep your retirement income steady. With defined benefit SPPs, the pension payable under the plan is reduced at a certain age (often 65) by an amount less than or about equal to the amount of your QPP (or CPP) pension, adjusted for age. The reduction is proportional to the number of years you contributed to your SPP. Adjustment terms may vary from one plan to the next.
- Imagine, for example, that your SPP is integrated with your QPP pension at age 65, but you decide to begin receiving your pension at age 60. You may receive $1,000 per month from your SPP from age 60 to 65, then $570 per month (example only) when you turn 65. At that time, you will begin receiving your Old Age Security pension and if you apply for it, your QPP pension.
- What is owing if you leave your job before retiring?
- You may be entitled to a deferred retirement pension one that's payable at a later date. For SPPs subject to the Supplemental Pension Plans Act, you have this right as soon as you become a plan member. With other types of plans, there may be conditions such as a certain number of years of service with the employer, years of contribution to the plan, or years of participation in the plan. For example, DPSPs can require 2 years' participation. If you are not entitled to a retirement pension, your contributions will usually be reimbursed with interest.
- Instead of receiving your pension, you may have the option of transferring the value of your benefits to an LIRA, LIF, or other eligible vehicle, usually before the age of 55. Some restrictions apply.
- What is owing if you die before receiving a retirement pension?
- As a general rule, a death benefit will be payable. Depending on the plan, the value of it may be equal to your total contributions plus interest or the value of your accrued benefits. It may come in the form of a lump-sum payment or, more rarely, in the form of pension payments.
- The beneficiary can be your spouse, your child, or someone else. Some rules apply. Depending on the plan and applicable legislation, a death benefit may be automatically paid to your spouse unless he or she has waived the right.
- What is owing if you die after payment of your retirement pension has begun?
- A death benefit is usually payable according to the characteristics of the pension that you were receiving, including any guaranteed term or the joint and survivor provisions. A guaranteed term is the minimum number of months for which payment must be made. Joint and survivor provisions specify the percentage of the total pension that must be paid after your death. If your pension has both a guarantee and joint and survivor provisions, you should find out how they work and which would take precedence.
- The beneficiary can be your spouse at the time payment of the pension began, your spouse at the time of death, your child, or another person. Some rules apply. Depending on the plan and applicable legislation, the death benefit may be automatically paid to your spouse unless he or she has waived the right.
- What is owing if you get divorced or separated?
- A conjugal breakdown, such as divorce or legal separation, can have an impact on your retirement income if your pension benefits have to be partitioned and shared with your ex-spouse. It depends on your plan, the applicable legislation, and any court judgment. Different rules may apply depending on whether you and your former spouse were married, in a civil union or in a de facto (common law) union. A variety of factors may be taken into consideration, such as whether the rules of family patrimony apply to your situation, whether your private pension plan is part of your family patrimony, and whether your private pension plan is part of a contract with your spouse.
- What is owing in the event of disability?
- You may be entitled to a disability pension if stipulated in your plan. Depending on your situation, the disability pension may be reduced to offset any disability pension payable under a general program such as the QPP (or CPP), SAAQ, or CSST.
Worth knowing about...
- It is important to distinguish between the notions of "service," "credited service," and "membership":
- Service refers to the period during which you work for your employer
- Credited service refers to the work period that is taken into account under your pension plan (e.g., for calculating your pension or as an eligibility condition for certain benefits)
- Membership refers to the period during which you participate in a pension plan.
Take a look at the following example: You're hired on February 1, 1990, and your employer sets up an SPP on February 1, 1995. When you become a member of your SPP, on February 1, 1995, your employer credits you with 2 years of service for the purposes of the plan. You stop working and your membership in the SPP ends on January 31, 2003. You have 13 years of service with your employer, 10 years of credited service under the SPP, and 8 years of membership in the SPP.
- If you are entitled to a SPP but put off requesting payment, there's no guarantee that your payments will be increased to account for those that were missed.
- As a general rule, Québec employers cannot require employees to retire at age 65. More information on mandatory retirement is available on the Website of Human Resources and Skills Development Canada at www.hrsdc.gc.ca , specifically at www.hrsdc.gc.ca/eng/labour/employment_standards/publications/prohibitions.shtml
- In rare cases, a death benefit that becomes payable before payment of a retirement pension begins may be slightly higher in value than the severance benefit. However, a ceiling can be applied to both.
- The definition of de facto (common law) spouse may vary according to the pension plan and applicable legislation. Different definitions are used for SPPs subject to the Supplemental Pension Plans Act and those subject to the Pension Benefits Standards Act, 1985. The person who could qualify as a de facto (common law) spouse for income tax purposes may not be considered as it for your SPP.