A pension plan can put you ahead of the game

Pension plans are a way to supplement the income provided by public plans. Income from a pension plan can help you maintain your standard of living during retirement. That's what makes it such an interesting option.

Here's how a pension plan can help you maintain your standard of living during retirement

If your employment earnings are $58 700 in 2020, which is the maximum pensionable earnings (MPE) under the Québec Pension Plan, your retirement income from the public plans (Old Age Security and the Québec Pension Plan) will amount to about 40% of your earnings. To maintain your usual standard of living, you will have to make up the difference with income from other sources. Generally, it is estimated that a work will need about 70% of his or her gross annual pre-retirement income for the last 3 years to maintain the same standard of living during retirement. The percentage of the difference to be made up becomes increasingly greater at higher income levels. 

It's not just for your retirement

  • The contributions that you make to a pension plan are deductible for income tax purposes.
  • Investment income earned by the pension fund in which your benefits accumulate are tax exempt.
  • Money is put aside to provide you with retirement income when the time comes.
  • If you die and you have a spouse, he or she will be entitled to a pension or a death benefit. In the absence of a spouse, survivor benefits can be paid to your designated beneficiary or to your heirs.
  • The benefits accumulated in a pension plan cannot be seized except in limited circumstances, such as ensuring payment of alimony or partition of family patrimony. Thus, you can be sure that your benefits will be there for you when you retire.

Contributions that grow

The pension fund, which is subject to rigorous administration, is composed of contributions from the employer as well as those from the members (if they are required to contribute). It could be called the plan's "bank account".

There are several types of contributions made to a pension fund:

  • employer contributions: those that your employer is required to make
  • member contributions: those that you may be required to make and which are deducted directly from your pay
  • additional voluntary contributions: those that you can make without a matching employer contribution, if allowed under your plan

The main types of pension plans

Defined contribution plan, defined benefit plan and simplified pension plan

Defined contribution plan

In this type of plan, the amount of contributions that must be made to the pension fund is determined in advance. The amount of your income at retirement depends, among other things, on the total amount accumulated in your account.

Defined benefit plan

The majority of people who have a pension plan participate in a defined benefit plan. This type of plan makes it possible for you to know the amount of your retirement pension in advance. The amount generally corresponds to a percentage of your pay multiplied by the years of service recognized by the plan.

In general, the contributions that you make, if required by your plan, are determined in advance by the plan, and the employer is responsible for the balance of the contributions. The risks connected to the plan's funding will be assumed primarily by your employer.

Simplified retirement plan

The simplified retirement plan (SIPP) is a defined contribution plan with some specific features and in which several employers participate. It is offered and administered by a financial institution.

Each member of this type of plan actively takes part in the management of his or her retirement savings. The member decides how the contributions in the locked-in and not locked-in accounts will be distributed among the various types of investments offered by the financial institution.

Let your employer know about...

the advantages of offering a pension plan to employees and the main features of the different types of plans

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