Author Topic: Pension adjustment and RRSPs  (Read 1510 times)

NorthernDreamer

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Pension adjustment and RRSPs
« on: December 07, 2016, 08:38:25 AM »
For some reason I can't quite find the answer to this question by Googling. I have a job with a pension - I contribute 8% of my salary, my job contributes 7%. Is my pension adjustment for RRSP contribution room as simple as reducing it by 15%? So does that mean my RRSP contribution room in any given year is only 3%? Or is the math more complicated than that?

Luckily I have unused room from previous years, which I've been slowly using up. I need to log into my CRA account to start keeping a closer eye on my RRSP and TFSA contribution room now that I'm investing more heavily. I'm just wondering when I'm all caught up, how I can plan going forward.

Also - I am hoping to retire sometime between ages 49-53, and will have to decide what to do about my pension. Each year of your pension, they calculate your payout based on defined benefit and defined contribution, and then give you the HIGHER amount. Shocking. However, I doubt it will stay like that by the time I retire.

GreatLaker

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Re: Pension adjustment and RRSPs
« Reply #1 on: December 07, 2016, 09:37:52 AM »
Believe your assumption is correct for a DC plan. There's a different formula for DB plans.
This explains it: http://www.advisor.ca/retirement/retirement-news/area-52-know-your-pension-adjustments-45085

2 great resources are:
https://www.amazon.ca/Real-Retirement-Could-Better-Happen/dp/111849864X
https://www.amazon.ca/Pension-Puzzle-Complete-Government-Benefits/dp/0470839538

The first explains how to determine what you will need to retire based on current lifestyle and spending. The second is a more detailed analysis of govt and workplace in Canada. I got both from the library.

NorthernDreamer

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Re: Pension adjustment and RRSPs
« Reply #2 on: December 07, 2016, 10:18:05 AM »
Thanks for that link, GreatLaker. It made me realize I should actually just call my HR department to find out, since I am not sure what my pension plan is considered for these purposes.

I also want to attend one of the retirement planning work seminars that they aim at people aged 50-65. I can't imagine the side eye I'd get there... I am trying not to overthink what I'll do, since the earliest you can take your pension is 55 and it's at a HUGE cut.

powersuitrecall

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Re: Pension adjustment and RRSPs
« Reply #3 on: December 07, 2016, 10:55:08 AM »
Your assumptions sound correct.

For forward planning I just assume what happened in previous years will continue to happen.  It's not quite as simple as that, as GreatLaker's links detail, but for planning it's close enough.


Example:

Base Salary = $80,000
Overtime/Pager Pay = $20,000
Pension Adjustment = $11,000 (~13.75% Base Salary)

RRSP Room:
18% of $100K Gross = $18,000
Pension Adjustment = -$11,000
RRSP room for following year = $7,000

GreatLaker

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Re: Pension adjustment and RRSPs
« Reply #4 on: December 07, 2016, 12:14:44 PM »
If it is as simple as they put in x% and you can put in up to y% and you get a choice of mutual funds to invest in, it sounds like a DC pension. Do you get an annual statement that says how much it's worth? That would be a DC plan.

DB pensions have formulas like your pension will be 2% of average salary over last 5 years before retirement x years of service (up to a maximum of 35 years) with reduced pension if you retire before age 65 or before your age+years of service <90.

Usually HR will have a booklet or online resources to describe it. Based on your comment about how payout is determined it may even be some type of hybrd plan.

Finiki.org is always a good reference for investing and personal finance:
http://www.finiki.org/wiki/Pension_plan
http://www.finiki.org/wiki/Defined_contribution_pension_plan
http://www.finiki.org/wiki/Defined_benefit_pension_plan

FrugalFan

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Re: Pension adjustment and RRSPs
« Reply #5 on: December 07, 2016, 01:02:49 PM »
Your pension sounds exactly like mine. Hybrid. Higher of defined contributions or defined benefits. And it is my understanding that they calculate your RRSP contribution room the way you have explained it. I have very little room to contribute each year.

NorthernDreamer

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Re: Pension adjustment and RRSPs
« Reply #6 on: December 08, 2016, 11:31:10 AM »
From my pension booklet:
"The Plan is a Money Purchase (also referred to as Defined Contribution) plan with a Minimum Guaranteed Pension level (also referred to as a  Defined Benefit). This two-part or “hybrid” plan design provides you with a  better benefit than a more traditional plan,  because it enables you to reap the rewards of the plan’s investment performance, whilehaving the security of a minimum guaranteed benefit."