Workplace Pensions in Canada: Defined Benefit, Defined Contribution and Your Choices

A workplace pension can be one of the largest sources of retirement income for people who have one, and it comes with decisions: how it affects your RRSP room, what to do with it if you leave the employer, when to start it and in what form. This hub explains how each part works and links to a guide for each decision. It is part of the retirement section.

The two main types

• Defined benefit (DB): the plan promises a pension worked out by a formula, for example a percentage of your earnings for each year of service. The plan, not you, carries the investment risk.
• Defined contribution (DC), also called money purchase: contributions are credited to an account in your name, and your pension depends on how much has built up.

Defined benefit vs defined contribution compares them in detail.

How a pension affects your RRSP room

If you belong to a registered pension plan or a deferred profit sharing plan, your pension adjustment (PA) for a year, shown in box 52 of your T4, reduces your RRSP deduction limit for the next year; a PA can be zero but never negative, and a pension adjustment reversal (PAR) can restore room if you leave a plan having received less than your PAs counted. Pension vs RRSP works through the numbers, and pension adjustments explained covers the calculation.

Leaving a plan

Pension standards law decides what you keep when you leave. Plans for federally regulated employers follow the federal Pension Benefits Standards Act; other plans follow their province’s pension act, which sets its own rules.

• Vesting: In a federally regulated plan, a member who leaves is entitled to a deferred pension for the service and salary up to the date they leave, calculated in a similar manner and payable on the same terms as the plan's pension; provincial pension laws set their own vesting rules.
• Transferring the value out: A member of a federally regulated plan who leaves before they can start an early pension (10 years before pensionable age) can transfer the value of their pension to another pension plan that accepts it, to a locked-in retirement savings plan, or use it to buy a life annuity, by notifying the administrator within 90 days of leaving (a survivor has the same right if the member dies before then); once they can start a pension, this transfer right no longer applies (the plan's own terms may still allow one).
• Taxes on a lump sum: A lump sum from a defined benefit pension can move tax-deferred only by direct transfer, and when it goes to an RRSP, RRIF, PRPP, SPP or a money purchase plan, only up to a limit set by the Income Tax Act; any part above the limit is taxable income in the year (an excess sent to an RRSP or RRIF counts as an RRSP contribution, deductible only within your RRSP deduction limit).

Pension or lump sum covers the decision, and should I transfer my pension to a LIRA the locked-in account the money goes to.

Starting your pension

• Early retirement: A federally regulated plan must let members start a pension from 10 years before the plan's pensionable age, based on service and salary to the retirement date; the plan may reduce an early pension, but its actuarial value can't be less than the pension that would have started at pensionable age.
• Survivor pension: In a federally regulated plan, a member who has a spouse or common-law partner when the pension starts receives it as a joint and survivor pension that pays the survivor at least 60% of the amount paid while both were alive; a form paying the survivor less needs the spouse's or partner's written agreement on the prescribed form.
• Tax: a workplace pension is taxable income, and lifetime pension payments from it qualify for the pension income amount and pension splitting at any age (variable benefits from a DC account generally from 65): Up to $2,000 of eligible pension income qualifies for the federal pension income amount; RRIF and annuity payments count from age 65 (or earlier if received because a spouse died), lifetime pension (life annuity) payments from a registered pension plan at any age, and CPP, OAS and GIS payments never count.

Guides in this hub

• Defined benefit vs defined contribution: how each type works, the pension adjustment, leaving a plan and survivor options.
• Pension vs RRSP: a workplace plan compared with saving in your own RRSP.
• Pension or lump sum: the commuted value, how it is paid and taxed, and the trade-offs.
• Pension buyback: buying past service and its effect on RRSP room.
• Individual pension plan (IPP): a defined benefit plan for incorporated owner-managers.
• What is a PRPP: pooled plans for employees and self-employed people without a workplace pension.

Related guides

• CPP and OAS, the government pensions
• LIRA withdrawal rules and DPSPs
• Retirement income and retirement planning