Types of plan pensions
A defined benefit pension plan must offer certain types of pensions. It can also offer other types as options.
A plan must provide all of the following:
- Normal pension: the pension payable at the normal retirement age (65 unless the plan provides otherwise)
- Deferred pension: the pension to which a member is entitled but which must be paid later because it is still too early for the member to receive a pension
- Early pension: a pension paid before the normal retirement age (between 55 and 65, unless the plan provides otherwise)
- Postponed pension: a pension paid after the normal retirement age (after 65 unless the plan provides otherwise)
- Additional pension: a supplement to the retirement pension
Your plan may provide:
A plan may also give entitlement to cash payments (refunds).
Age is a deciding factor
A member's age is a deciding factor in determining the type of pension to which the member is entitled. Furthermore, the plan's normal retirement age must be considered. The normal retirement age is indicated in the plan summary.
The younger a member is when he or she retires, the lower the retirement income will be. Members should be sure that they have enough income for their retirement needs. They may want to see a financial planner.
Worth knowing about ...
- A member cannot be forced to retire when he or she reaches the normal retirement age under the plan.
- Payment of a retirement pension must begin no later than 31 December of the year in which the member reaches age 71, even if he or she continues to work.
- To receive a retirement pension, a member must make an application to the plan administrator.
Normal pension: the pension payable at the normal retirement age
The plan must provide for the payment of a "normal pension", that is, a pension payable as of the normal retirement age under the plan. It must be a life pension, that is, payable until death.
The normal pension is payable when a member stops working at the normal retirement age that is set under your plan (usually 65). It will not be paid automatically. The member must apply to the plan administrator.
A helpful example...
Suppose a member stopped working at age 65, which is the normal retirement age under your plan. The member made an application to receive a pension as of age 65. The member will receive the normal pension under the plan.
Deferred pension: payment of a pension is delayed if it is too early for payment to begin
If active plan membership ends and a member is not yet old enough to receive a pension under the plan or if the member is old enough but does not want to begin receiving his or her pension right away, he or she is entitled to a deferred pension, whose payment will begin at a later date.
Payment of a pension can be requested when a member is 10 years or less away from the normal retirement age under the plan (for example, at age 55 if the normal retirement age is 65) whether the member continues to work or not.
Worth knowing about ...
- If a member requests payment of his or her pension before the normal retirement age, the amount will usually be reduced because the pension will be paid for a larger number of years.
- If a member requests payment of his or her pension after the normal retirement age, the amount will not necessarily be increased.
A helpful example...
Suppose the normal retirement age under the plan is 65. A member leaves his or her job at age 48 and is no longer an active member of the plan. He or she has a vested pension of $1000 a month.
He or she can request payment of his or her pension as of age 55.
- If the request is made before age 65, the amount of the pension may be less than $1000 because the pension will be paid for a greater number of years.
- If the request is made at age 65, the pension will be $1000 a month.
- If the request is made after age 65, the amount of the pension may still be $1000 a month as of the month of the application.
Early pension: a pension paid before the normal retirement age
A member is entitled to an early pension if he or she stops working during the 10 years that precede the normal retirement age under the plan (whether or not active plan membership has ended).
If the member takes an early pension, the amount will usually be reduced because the pension will be paid for a greater number of years.
A helpful example...
Suppose a member is entitled to a pension of $1000 as of age 65, which is the normal retirement age under the plan. He or she asks for payments to begin at age 62. The reduction set by the plan is ½% a month for each month before age 65. He or she will thus be entitled to an early pension of $820 a month as of age 62, that is, $1000 less a reduction for early pension of $180 (½% of $1000 × 36 months).
A pension plan may give entitlement to an early pension at an earlier time, that is, before a member is at least 10 years away from the normal retirement age. For information about the plan's rules, consult the plan summary.
If active plan membership ends more than 10 years before the normal retirement age and a member wants to receive a pension before the normal retirement age, he or she can ask for payment of a deferred pension at any time, provided he or she is no more than 10 years away from the normal retirement age.
A helpful example...
Suppose the normal retirement age is 65 and active plan membership ends before age 55. The member can apply for payment of a pension as of age 55.
Postponed pension: a pension paid after the normal retirement age
A member is entitled to a postponed pension if, when he or she reaches the normal retirement age, he or she continues to work for the same employer. Payment of the pension will be delayed unless the member and the employer agree otherwise. It will begin when the member stops working or no later than 31 December of the year in which the member reaches age 71.
The amount of the pension received will be higher than the amount provided for at the normal retirement age because, being started later, it will be paid for a shorter period of time.
A helpful example...
Suppose a member who stops working at age 65 would be entitled to a pension of $1000 a month.
If he or she stops working at age 67, the pension will be $1080* a month.
* This amount is given for illustrative purposes. The actual amount would be based on interest assumptions and the member's sex and age at the time of the calculation.
Worth knowing about ...
- If a member continues working for the same employer after the normal retirement age, he or she will not lose any pension payments that would ordinarily have been made if he or she had stopped working at the normal retirement age. However, at retirement, no retroactive payments will be made. Instead, the amount of his or her pension payments will be increased by a corresponding amount.
- If a member continues working but his or her pay is reduced permanently, for example, because of a reduction in work hours, he or she can request that a portion of the retirement pension be paid immediately to offset the reduction in earnings.
- As soon as a member is no longer working for the employer that he or she had at the normal retirement age, the member's pension becomes payable. If it is taken at a later date, it will not be increased to take into account the payments that ordinarily would have been paid since the end of his or her employment, unless the plan provides otherwise.
- If a member and the employer continue to contribute to the plan after the member reaches the normal retirement age, the contributions made after the normal retirement age (i.e., during postponement of the pension) will give the member entitlement to an additional pension.
Additional pension: a supplement to a retirement pension
A member is entitled to an additionnal pension based on :
- amounts transferred from a previous pension plan that cannot be refunded in cash
- additional voluntary contributions (contributions that were made without a corresponding contribution by the employer) that have been converted into a pension
- excess member contributions, that is, member contributions with interest that exceed 50% of the value of the pension to which the member is entitled
- member contributions, with interest, that were made after the normal retirement age (that is, during the postponement of a pension).
If active plan membership ends more than 10 years before the normal retirement age (for example, before age 55 if the normal retirement age is 65) and the pension has low or no indexation between the date on which the member stopped working and the date on which he or she is 10 years away from the normal retirement age, the member may be entitled to an additional pension.
The additional pension will be added to the retirement pension.
Bridging pension: a supplement to the retirement pension payable before age 65
A bridging pension is a temporary supplement that a plan may offer and that is usually paid until a member begins receiving the public pensions under the Old Age Security program and the Québec Pension Plan. The bridging pension has no effect on the amount of the retirement pension provided under the plan.
Unlike a temporary pension, which is an advance on retirement income, a bridging pension is a supplement to retirement income.
A helpful example...
Suppose a member is 62 years old. He or she is entitled to a retirement pension of $1000 a month ($12 000 a year) and to a bridging pension of $3000 a year until age 65. The member will have an annual income of $15 000 ($12 000 + $3000) until age 65 and $12 000 as of age 65.
To those amounts will be added the retirement pension under the Québec Pension Plan and the Old Age Security pension, when they begin.
The plan determines the age limit for receiving a bridging pension. Whether or not the member begins receiving the public pensions will not affect that limit.
For example, suppose that a plan offers a bridging pension that is payable until age 65 because that is the age at which the member will be entitled to a full pension under the Québec Pension Plan. Even if he or she applies before age 65 for an early retirement pension under the Québec Pension Plan, the bridging pension will be paid until age 65.
Phased retirement benefit: a salary supplement to encourage people to continue working or to return to work
If the plan allows, a member can reach an agreement with his or her employer to receive a phased retirement benefit under the plan while continuing to work full-time or part-time, if he or she is:
- at least 60 years old
OR
at least 55 years old and receiving or entitled to receive an unreduced early pension
- under 65 years old
Worth knowing about ...
As of age 65, the provisions for a postponed pension apply.
If the normal retirement age under the plan is under 65, a member must choose between a phased retirement benefit and a postponed pension for the period between the normal retirement age and age 65. The member can successively receive one then the other but not both simultaneously.
The phased retirement benefit does not reduce the amount of a member's retirement pension. If the plan so provides, a member can also accumulate new benefits during phased retirement, which will increase his or her retirement pension.
The calculation and payment terms of a phased retirement benefit must be included in the agreement. However, the amount of the benefit cannot exceed 60% of the amount of the pension to which the member is entitled or is already receiving, excluding any pension resulting from excess member contributions, additional voluntary contributions or sums transferred to the plan.
An agreement cannot provide for age conditions or other conditions that would be more advantageous.
To receive a phased retirement benefit, a member must make an application with the plan administrator.
A helpful example...
A member is 60 years and entitled to a retirement pension of $2000 a month. Her excess member contributions provide an additional pension of $200 a month. In addition, the plan provides her with a bridging benefit of $400 a month until age 65. Thus, if she retires, her pension will be $2600 a month until age 65 and $2200 thereafter.
The maximum phased retirement benefit is $1400 a month, that is, 60% of $2400 since the additional pension of $200 a month is not included in the calculation.
If a retired member returns to work for an employer who is party to the same plan and if the member receives a phased retirement benefit, his or her retirement pension will be suspended.
Note that...
There is
another phased retirement benefit; it gives entitlement to a cash payment. A member cannot receive both benefits for the same period.
Disability pension
If disability forces a member to stop working for the employer who offers the plan or to cease active plan membership, the plan can provide for payment of a disability pension. Information about the availability and conditions of a disability pension can be found by checking the plan summary or contacting the plan administrator.
The value of a disability pension must be at least equal to the value of the benefits to which the member would have been entitled in the absence of disability. The amount of a disability pension may thus be different from the amount of a member's vested retirement pension.
Note that...
Disability may also give entitlement to a cash payment.