Your employer may offer a company pension plan to help you save for retirement.
There are two types of pension plans:
- Defined benefit plans, and
- Defined contribution plans.
What’s the difference between defined benefit plans and defined contribution plans?
A defined benefit plan:
- Guarantees how much pension you will receive when you retire. The amount is usually pre-determined based on a formula involving your years of service, your earnings and your age at retirement.
- You have no active involvement in the plan, as your company makes the decisions about investing the overall plan's funds.
A defined contribution plan:
- Bases your pension on the value of the contributions and their investment returns in your account at the time you retire.
- Your company usually makes contributions based on a fixed percentage of your salary. Plus, many plans will allow you to make additional contributions that your company may match up to a specific amount.
- You have control over the investment strategy for the account based on your risk tolerance and investment goals.
Why contribute to your company’s plan?
There are several benefits to contributing to your company pension plan:
- First, if your company offers matching contributions, by putting in an amount equal to what you contribute, or a percentage of what you contribute, you're essentially getting free money you would otherwise not receive.
- Second, your contributions are tax-deductible, meaning you pay less income tax now. And the funds remain exempt from tax until they are withdrawn.
- Third, a company pension plan is also a great way to supplement other forms of retirement savings, such as the universal, public Canada Pension Plan, CPP, or Quebec Pension Plan, QPP, and other individual savings plans, such as RRSPs or TFSAs, Tax-Free Savings Accounts.
Understanding what your company pension plan offers can help you determine how to make the most of all your retirement savings options.