The next section of the Action Financial Group Orientation Series will deal with Investment Account Types.
An account is not an investment; it is a container that holds one or more investments. Different containers have different features such as size, shape or colour, one hole in the bottom or none, a lid or no lid; different accounts have different features too, such as tax treatment, size limitations, or rules about contributions and withdrawals. Not all accounts are suitable at different life stages or circumstances and it’s always best to seek advice.
Pension Plans: Defined Contribution & Defined Benefit Plans
Pension Plans are one type of retirement savings plan. Pension plans are only offered through your employer, and not all employers offer them. There are two primary types of pension plan.
Defined Contribution – As the name suggests, there is a specified contribution that is made to this plan on a regular basis, that is a combination of contributions funded by the employer, and/or the employee. The amount of the contribution is known, and is usually a set percentage of employment earnings. The employee is given investment options by the administrator of the plan, and the contributions are invested accordingly. The future value is not known. It depends on the investment choices and performance. The employer’s responsibility ends when they make the contribution. They have no responsibility for the future value of the invested funds.
Defined Benefit – As the name suggests, there is a specified future benefit in this plan. The retirement benefit is determined by a formula that can vary from one plan to another, but often is determined by a combination of best or last 5 years of income, the number of years of service, and a factor. For example, the factor could be 1.5% x $50,000 (average best 5 years of income) x 25 years of service = $18,750. This is not typical; it is just an example. Every DB plan can have a different formula. It can be set by the employer, or it can be negotiated in contract negotiations between employer and unions. The amount of contribution into this plan is calculated by actuaries, and is based on what amount of funding now invested over the long term will generate the required benefit at retirement.
Both Defined Contribution and Defined Benefit plan contributions by the employee are tax deductible and are limited by the individual’s RRSP room. Pension plans may have withdrawal restrictions prior to retirement, and may have strict limits on the amount that can be withdrawn yearly after retirement.
One pension plan can be very different from another; therefore, it is very important that you clearly understand:
• If you have a pension plan or not
• If your pension plan is a Defined Contribution or Defined Benefit Plan
• What the benefit formula is for your DB plan
Professional advice can help you to fully understand your pension plan and how much of your retirement needs it might provide; and if you don’t have a pension plan, what your other options are to provide for your retirement income needs.
We hope you will find this information valuable and will increase your financial confidence. You can always find these articles on our website www.actionfinancialgroup.com.
Karin Rimnyak, Certified Financial Planner®
David Dryburgh, Certified Financial Planner®
Ian Barrie, Qualified Associate Financial Planner™
This information has been prepared by Karin Rimnyak who is an investment Advisor for iA Private Wealth. Opinions expressed in this email are those of the Investment Advisor only and do not necessarily reflect those of iA Private Wealth. iA private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.