What’s a pension plan?
Posted on December 24, 2015
So I just started a new job this year which has been wonderful! And then I received a large envelope the mail which turned out to be my pension plan package! I’m feeling very grown up even though I had no idea what a pension plan was or how it works!
Being so excited to plan my retirement already, I set up my online account right away but realized there was no statement information available yet. However, there was an option to sign up for a free pension seminar so I thought that would be a great way to learn more.
Keep in mind, I am in the Municipal Pension Plan by Pensions BC so other pensions may have different details.
- A pension plan promises to pay you a certain amount of retirement income for life, regardless of investment returns.
- The amount of your pension is based on a set formula of your highest average salary for 5 non-consecutive years and years of service. It is not based on contributions to the plan or on the performance of the plan’s assets.
- In most plans, both you and your employer contribute.
RRSP vs. MPP Pension
Here is a chart summarizing some of the main differences between RRSPs and an MPP Pension. Note that the presentation was presented by a pension company so the information could be bias and could vary for different plans.
|What is the pension money based on?||Market rates (could collapse)||Set pension formula based on salary (your highest 5 years of salary, not consecutive) and years of service (max: 35 years). A predictable number you can calculate today. Overtime and bonus is not pensionable. Includes inflation adjustment benefit, but not guaranteed.|
|Who takes the risk?||You||Shared risk between you and your employer|
|What do you get?||Annuity/RIF, until the money runs out||Lifetime monthly pension|
|Early retirement?||Potential||Yes, there are provisions to retire before 65 years old (earliest at 55, up to 71 years old or up to 35 years of service). There is a bridge benefit (temporary monthly payment) available until you hit 65 years old.|
|Health benefits?||No||Yes, you could opt to pay for group benefit subsidies, but they are not guaranteed|
Once you retire, your pension is paid for the entire length of your life. Woohoo! You also have the option at retirement to (pay extra) and choose your spouse or beneficiary to continue to receive the payments after your death.
If you quit your job and leave the plan before retirement age, you could choose to take your pension at retirement age, or transfer the value to a locked-in RRSP or another registered pension plan.
You can estimate the projected monthly pension benefit you’ll receive when you retire using the formula.
Lifetime pension = (1.3% x HAS up to YMPE + 2% x HAS in excess of YMPE) x years of service
HAS: Highest average salary, based on your highest five years of annual salary.
YMPE: Year’s maximum pensionable earnings, the maximum salary limit for contributions to the Canadian Pension Plan. The 2015 YMPE is $53,600, which means if your salary is less than YMPE, you don’t get the second part of the formula underlined in the brackets.
How much does it cost?
Employers automatically deduct a set percentage of your salary from your paycheque. The rate at which you and your employer contribute is set by the Board of Trustees. Every three years, the plan’s financial health is assessed and contribution rates change if required.
Age 55: You could choose to have an early retirement and start receiving MPP bridge benefit up until 65 years old and a reduced MPP basic lifetime pension.
Age 60: You can start receiving Canada Pension Plan.
Age 67: You can start receiving Old Age Security.
If you choose to retire early, you’ll receive a bridge benefit from 55-65 years old as a temporary monthly payment, as well as a potentially reduced pension. Bridge benefit is calculated as:
0.7% x HAS up to YMPE x years of service
And if you don’t meet the rule of 90, your pension will be reduced by approx. 3% each year that you are under the rule of 90 or age 60. The rule of 90 means your age added together with your contributory years of service needs to add up to 90 in order to receive an unreduced early pension.
For more information on pensions, visit the Pensions BC website.