Class Lecture Notes (ch 4 - RPP) DC Plan PDF

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chapter 4...

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Registered Pension Plans (RPPs) Defined Contribution Pension Plan (DC)  Setting up an RPP o RPPs can be set up by:  An employer  A group of employers (called “Multi-Employer Pension Plans or MEPPs)  A union  Contributory or Non-Contributory o RPPs can be contributory or non-contributory o Non-Contributory  Employees do NOT make contributions  Only the employer makes contribution to the pension fund o Contributory  Both employees and employers make contributions.

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2 Types of RPPs  1) Defined Benefit (DB) o In a DB plan, your employer promises to pay you a regular income after you retire. o Usually both you and your employer contribute to the plan. o Your contributions are pooled into a fund. o Your employer or a pension plan administrator invests and manages the fund. o You don’t have to make any investment choices. o The income you get when you retire is usually calculated based on your salary and the number of years you contributed to the plan. o It's a set amount that does not depend on how well the investments perform.

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 2) Defined Contribution (DC) Pension Plan o In a defined contribution pension plan, you know how much you will pay into the plan but not how much you will get when you retire. o Usually, you and your employer pay a defined amount into your pension plan each year. o The money in your defined contribution pension is invested in one or more products on your behalf. o You may be able to choose how your money is invested. o The amount you get when you retire will depend on how your plan is managed and how these investments perform. o You will usually have to choose where to put the money in your defined contribution pension plan when you retire. o Your options will often be to put your money in:  An Annuity  DC Plan amount at retirement is $1,000,000.  Give $1,000,000 to an Insurance company and they are going to promise to pay me $50,000 per year until I die.  If I live 20 years, I would have made up the $1M and if I live longer than 20 years, then I made a bit of money.  A Locked-in registered retirement savings plan or locked-in registered retirement income fund  A combination of these two options 3

o You may be able to take the money from your pension plan in cash if it is below a specific amount.  Depending on your age and the terms of your pension plan, you may also be able to reinvest some of this money in another financial plan, such as a Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) that is not locked-in. o Your pension plan administrator will usually tell you your options when you retire. o You may want to consider speaking with a financial advisor for help deciding how to manage the money from your defined contribution pension plan.  1) Defined Contribution o Contribution is known but not the end result o NO MAXIMUM PENSION BENEFIT o Contribution Levels, the LESSER of:  18% of earnings, and  Current money purchase contribution limit (i.e., $27,830 for 2020) o The minimum required employer contribution is 1% of employee earnings for the year. o Pension Adjustment (PA)  The PA amount is the value of the benefits you earned in under your employer's registered pension plans (RPP)  Employer + Employee contribution = PA  Reduces your RRSP contribution limit 4

RRSP Loans  RRSP Contribution Limit o The LESSER of:  18% of Previous Year’s Earned Income, and  Threshold of $27,230 for 2020 o For example, Pierre makes $100,000 per year.  18% of $100,000 = $18,000  The lesser or $18,000 and $27,230 is $18,000  Therefore, Pierre’s contribution room for 2020 is $18,000.  Let’s for the past 5 years, I was able to contribution $18,000 every year but I did not have ANY money to contribute.  Carry-Forward the UNUSED contribution limit.  So now my RRSP contribution limit is $90,000 that I can contribute. ($18,000 x 5 years).  Take an RRSP loan for $90,000 and spread the payments over 5 years. o $90,000 RRSP contribution will generate a refund of about $50,000. o So with the refund, I am going to pay down the loan and now my new loan amount is $40,000.

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