# Penison plan or RRSP



## harrison_c (Aug 30, 2010)

Hi,

I am confused with Penison plan and RRSP. I don't know what is the different between them and which one is better. Althought, I still have long long time to be retired but I want to choose which for my retirement.

thanks,


Harrison


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## Eclectic12 (Oct 20, 2010)

harrison_c said:


> Hi,
> 
> I am confused with Penison plan and RRSP. I don't know what is the different between them and which one is better. Althought, I still have long long time to be retired but I want to choose which for my retirement.
> 
> ...


Welcome to the board ... a lot depends on what you mean by "Pension Plan".

An RRSP is a Registered Retirement Savings Plan. It lets you defer the income tax on the contributions today to when the money is withdrawn in the future. The idea is that if you will use the taxfree time to grow the investments, allowing more growth than if you were paying the taxes on regular investments. 

Usually a Pension Plan is a company sponsored plan where either both the employee and the company contribute. On retirement, the employee starts drawing income from the plan to provide for their living expenses.

Most plans fall into one of two types. Plans that guarantee the contribution rates (Defined Contribution) and one that guarantee the benefit (Defined Benefit). 

An example of a DC plan I was offered was that the company put in 1% and I put in 1% of my annual salary. I'd get to choose between about 10 mutual funds to invest the 2%. When I retired, if the total amount would fund
a) 30+ years - great. 
b) 3 year - the company was off the hook.

An example of a DB plan was the company put in 4%, I put in 3%. For each year I with the company, the amount I'd be able to get would increase. So if I'd been with the company 40 years, I'd end up with 60% of the average of my last five years, until death. If the investments in the plan aren't enough, the company has to fund them (or as Nortel did, go bankrupt).

Assuming that you believe you have a good knowledge of investing (important for the example DC plan) and that the company will keep up with it's responsibilities in the DB plan, the tradeoff is the timeframe.

Someone who moves company to company a lot plus has good investment knowledge/discipline *can* do better controlling their own pension. This means both the DC plan plus putting other money aside.

Someone who either works at the same company a medium amount of time who doesn't have a lot of other investments, is better off with the defined benefit plan.


What is the choice you are trying to make?


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## andrewf (Mar 1, 2010)

Sounds like a good time to plug MoneyGal's book: Pensionize your nestegg

Available at all fine bookstores and libraries.


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## MoneyGal (Apr 24, 2009)

The first chapter, available for free download from the publisher here, provides a detailed look at the questions "what is a pension" and "do you really have a pension?"


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## the-royal-mail (Dec 11, 2009)

Yes, that book would be the answer to the OP's question. I'm slowly making my way through it and trying to understand.

But to answer the question in this forum as was asked, the RRSP is a method by which you do all the work to set aside as much money for retirement from your personal savings as you like. This money is locked-in tax-free and any growth in the investment is also tax free until you cash out. The money only becomes taxable when you retire and/or start withdrawing from the fund.

A pension is different, and is usually administered by a 3rd party such as your employer or a pension fund. Typically they match your contributions dollar for dollar. Any amounts contributed by you and your employer in a year are deducted from your RRSP contribution limit. So if you have a pension plan, you need to be careful that you don't additionally overcontribute.

According to MG's book, the total RRSP contribution room Canadians have available to them is largely unused. I think it's safe to say that overcontributing isn't much of a problem.

Does this help?


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## andrewf (Mar 1, 2010)

The most important thing is that not everything that is called a pension is a pension. Most people are offered DC pensions, which are not really pensions at all in the truest sense of the word. The OP did not specify which was offered.


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## Karen (Jul 24, 2010)

Harrison seems to think that he must make a choice between a pension or an RRSP. Many of us have taken part in both; for most of my working life, I worked for small companies that had no pension plan, so I invested my maximum amount in an RRSP. For the last 16 years of my career, I worked for the federal government, which meant I paid into a pension plan. That, of course, reduced the amount I could contribute to my RRSP, but I continued to contribute the maximum amount that I could.

Harrison doesn't explain his personal circumstances in detail, so it's not possible to understand whether he is faced with this choice now, or whether he's just trying to understand for the future. In either case, he should be aware that he can take part in both (provided that his employer has a pension plan).


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## Eclectic12 (Oct 20, 2010)

the-royal-mail said:


> Yes, that book would be the answer to the OP's question. I'm slowly making my way through it and trying to understand.
> 
> But to answer the question in this forum as was asked, the RRSP is a method by which you do all the work to set aside as much money for retirement from your personal savings as you like. This money is locked-in tax-free and any growth in the investment is also tax free until you cash out. The money only becomes taxable when you retire and/or start withdrawing from the fund.
> 
> [ ... ]


It is a good suggestion to check out the book and the summaries are good.

The one minor point is that I'd avoid using the phrase "locked-in tax-free". It may be confused with a Locked-In Retirement Account (or LIRA).

For example, I was able to transfer the vested part of my Defined Benefit plan from a previous employer to a self-directed RRSP. However, it had to be "locked-in". The only way I can get money out of it prior to retirement is if I can prove financial hardship or expected income of less than $31,500.

http://www.fsco.gov.on.ca/english/pensions/unlocking/


The RRSP on the hand, I can get anytime I want - I just have to ask for it. I'm not going to have full access to the money due to the with-holding tax and there will be delays processing the withdrawal compared to a regular bank account or a TFSA. But I don't have to prove anything to request a withdrawal.


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