Sources of Income in Retirement

Pension Plans

You may be a member of a company pension plan or plans and at retirement will be eligible to receive pension benefits. Pension plans are governed under either provincial/territorial law or federal law. Pension plans are all different so you should definitely contact your company’s human resources department or the pension administrator to learn the details of your plan.

Locking-In

Pensions are designed to provide an income during your retirement, so under pension laws, pension money is often wholly or partially ‘locked-in’. That means there are usually restrictions with respect to how much you can access at once.

Taxation of Pension Benefits

When contributions are made to a pension plan the contributor (the company and often the plan member) receives a tax deduction. The money then grows tax sheltered inside the plan. In other words, the payments you eventually receive have never been taxed. Therefore, any pension benefits received are fully taxed as income in the year received.

Different types of pension plans

There are two basic types of pension plans:

  1. Defined Contribution Plans (also known as Money Purchase Plans)

    These are fairly simple plans and similar to an RRSP. Your employer, and in many cases you, contribute to the plan and your eventual pension amount will depend on how much the contributions have grown to by the time you retire.

  2. Defined Benefit Pension Plans

    These plans are more complex and at retirement provide a specified amount of pension as determined by a formula.

Receiving benefits

If you have a Defined Benefit Plan your pension payments will start when you retire. If you have a Defined Contribution plan you will receive a lump sum from your pension plan. You have a number of options with respect to what you can do with that lump sum.

  1. Purchase an Annuity

    You can use the lump sum to purchase an annuity that is a contract that provides you with a specified payment over a specified time period. For example, an annuity may provide you with $25,000 per year to age 90. There are a number of different types of annuities you can buy.

  2. Transfer the lump sum to a locked-in retirement account

    If you are not ready to start drawing money from your pension you can transfer (with no tax implications) the accumulated value to a Locked-In Retirement Account or LIRA. A LIRA is a Registered Retirement Savings Plan (RRSP) that is locked-in under pension legislation. The money in a LIRA can be invested in anything that suits you, giving a great deal of flexibility. Your advisor can assist you in making the appropriate choices. When you are ready to start receiving the pension you can buy a life annuity, as described above, or transfer the funds into a Life Income Fund (LIF) or a Locked-in Retirement Income Fund (LRIF).

    With LIFs and LRIFs the money can be invested in any RRSP eligible investment that suits your circumstances providing flexibility. Under tax law you will be required to withdraw a certain amount of the value of the LIF or LRIF each year and will be fully taxed on it. However, you are also limited with respect to the maximum you can withdraw.

Your advisor can assist you in deciding what plan is appropriate for you and how your money can be invested.