Characteristics of a simplified pension plan

How a simplified pension plan (SIPP) works can be compared to the workings of a registered retirement savings plan (RRSP). Income at retirement depends on the amounts accumulated in the member's locked-in and not locked-in accounts. It also depends, among other factors, on the interest rates in effect when a life annuity is purchased or the rates applicable to a life income fund (LIF).

A high return on account investments combined with high interest rates at the time an annuity is purchased or high rates on an LIF results in a higher pension during retirement.

Each member of the plan selects from the options offered the investments to be made with the amounts credited to his or her accounts.

Locked-in and not locked-in accounts

Each plan member has two accounts: one is locked-in and the other is not locked-in.

Locked-in and not locked-in account
Type of contribution or transfer Locked-in account Not locked-in account
Employer contribution Yes No
Additional employer contribution Yes No
Member contribution Employer's choice Employer's choice
Additional voluntary member contribution No Yes
Transfer from a deferred profit-sharing plan (DPSP) Employer's choice Employer's choice
Transfer from a not locked-in source No Yes
Transfer from a locked-in source Yes No

Who assumes the risk?

The return on investments, good or bad, is reflected directly in the value of a member's accounts. The risk related to poor investment yields is assumed by the member. The employer's obligation is limited to making the contribution required under the plan's provisions.

What happens at retirement?

An SIPP is not used to "pay a retirement pension". Instead, the amount credited to the member's locked-in account is used to purchase a life annuity from an insurer or is transferred to a life income fund (LIF), from which a retirement income can be drawn. The amount credited to the not locked-in account can be withdrawn as cash, used to purchase an annuity or transferred to a registered retirement income plan (RRIF).

If the member does not retire immediately, the amount in the locked-in account must be transferred to a locked-in retirement account (LIRA) or another supplemental pension plan that allows transfers so that it can be used to provide a retirement income later. The amount in the not-locked-in account can be withdrawn as cash or transferred to an RRSP.

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