On the surface, defined benefit (DB) pension plans may all seem alike. But in fact these plans have a lot of differences and options that the Canadians who have them should be aware of before they retire.
There are basically two types of registered pension plans - defined benefit and defined contribution (DC).
Defined benefit plans define or guarantee a specific pension amount is paid regularly after you retire. The amount is set according to your age, length of service and salary.
The income received in a DC plan, however, is not predetermined. It is based on contributions made over the years and the investment income generated on those contributions.
Under a DB plan you continue to receive your retirement income until the time when you die whereas retirement income under a DC plan continues until there is no more money in your account. Investment decisions in a DB plan are made on your behalf by a professional asset manager of the pension plan trust in contrast to a DC plan in which you can make your own investment decisions based on your retirement income needs.
Statistics Canada estimates there about 4.5 million Canadians who have defined benefit plans. "It's easy for these Canadians to assume that their plans more or less are the same, but the reality is that plans vary from business to business," says Dave Ablett, director of tax and retirement planning with Investors Group. "Defined benefit plans offer a consistent guaranteed income, but they can be structured differently, so it's important to be informed about the choices and alternatives you have and to educate yourself on the details to avoid the stress, confusion and surprises that could prevent you from having the retirement you deserve."
A number of DB plans provide a bridging benefit for people who retire before 65. This is an additional benefit to the lifetime pension based on a percentage of the employee's average salary paid from the date of retirement that ends at age 65. A typical bridging benefit would be between $6,000 and $11,000.
DB plan members can opt for a single life or joint and last survivor options. A single life pension provides the highest monthly income but no benefits are paid to the surviving spouse once the retiree dies.
Many plan holders may want to consider a joint and last survivor option. This means that the pension will be paid for the person's life and then at death it will be paid to the surviving spouse. Some employers will offer a further option of choosing all or a portion (usually 60 per cent) of the pension for the survivor.
A minimum payment guarantee is another option for single life and joint and last survivor plans. It provides that payments will be made for a fixed period even if you die before the end of the period.
If you are a retired plan member you may be offered an "integration" option. This means that the lifetime benefit is increased from the date of retirement to age 65 and then at age 65 the lifetime benefit is reduced.
Some DB plans include a flexibility option which allows the plan member to make voluntary contributions to the plan. At retirement the value of these voluntary contributions allows the retiree to provide for enhanced benefits such as indexation or a larger survivor benefit.
Many public sector DB plans are indexed and provide an annual increase in payments for inflation as determined by yearly increases in the Consumer Price Index.
Normally, if you retire before a specific date such as age 60 the pension benefits are subject to an actuarial reduction.
Monthly pension payments from either a DB or DC plan are eligible for income splitting - up to50 per cent of the annual benefits paid to the retiree can be allocated to your spouse for taxation purposes.
Defined benefit plans are most often offered in the public sector and by large organizations such as the banks. In general, they are more costly for the employer than DC plans because the organization shoulders the risk should there be a funding deficit.
As a result, defined benefit plans are on the wane and many organizations that offered them are switching to defined contribution plans for current employees and for new hires.
Regardless which type of plan you are participating in, it's important to know the details of your plan and what options are available to you.
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.
Copyright 2013 Talbot Boggs
