Let's Talk: Defined Contribution Pension

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This week, let's learn about the last type of pension. I know you're sick of learning about all these accounts so I'll be moving away from account types after this. The other type of pension plan is called a Defined Contribution pension (DC). This is more common than the Defined Benefit pension (DB) due to its lower administration cost.

How Does It Work?

Both the employee and employer contribute to the pension but the decision to invest the funds is made by the employee. An RRSP's contribution room is also reduced by the pension adjustment. The risk is placed on the employee so they can plan and choose their investment. Unlike a DB pension, there is no formula to determine what benefit you will receive in retirement. Instead, it's undetermined and depends on what the investments will look like by the time the employee retires. You can still make projections based on the expected annual compounded growth rate of the investment but it's still not a guarantee. It's fairly more straightforward compared to a DB pension

 Upon leaving a job, you are entitled to the un-vested portion of the investment unless you fulfill the requirements. When you leave your job, you may:
  • Transfer your DC pension to a LIRA, RRSP, RRIF, RPP
  • Leave your pension with your employer
  • Buy an annuity with an insurance company
  • Transfer to new employer's pension plan

Similar to a DB pension, in death, your beneficiary will receive a lump sum or an annuity of the DC pension plan. There is also the option for a guaranteed period for a DC pension. Again, if you're expecting a shorter life expectancy, consider a guarantee period to ensure your beneficiaries are properly cared for. If you are expecting a healthy and long retirement, you may consider a shorter or no guarantee period at all.

And we are done with account types! If you remember my post about Non-Registered Vs. Registered, you're probably saying, "Tony, what about IPP & RCS"?  I don't believe those topics are for my targeted audiences so I won't be discussing them. IPPs are for rich folks to fund their own retirement. You can probably find a post to help you understand it if you Google them. See you next week with a fresh start!

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