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retirement and rrsps

The growing shift away from defined benefit pension plans is reinforcing the need for Canadians to more actively plan for their retirement, financial experts say.

For decades, most workers relied on a promise of how much they would receive in retirement from their company pensions.

Barring a corporate bankruptcy or dramatic underfunding, workers knew far in advance their retirement income from the company pension, plus the Old Age Security and Canada Pension Plan. Any gap with retirement needs could be supplemented with individual investments.

But that pension certainty is fading as many companies — faced with large unfunded liabilities and deficits amid low interest rates — moved employees, especially new recruits, to defined contribution (DC) plans that guarantee contributions but not final monthly pensions.

"There is complete uncertainty. All you have is a potential of money," says Jamie Golombek, managing director of tax and estate planning at CIBC Wealth Advisory Services.

"With a DC plan, all you know is how much money is there, how much is being contributed, so it's very similar to having an RRSP."

Peter Merrick, an exit planning consultant in Toronto, said the erosion of corporate pensions and changes to government retirement support have put more pressure on workers to step up personal investments through registered plans, tax-free savings accounts or regular investments.

"The emphasis has to be (that) you have to depend on yourself, and that's where the planning comes in," he said.

Merrick said the shift to defined contribution plans forces workers to take an active role in their investments, while those on DB plans are sometimes caught completely off-guard when things go wrong.

While some workers have seen their pensions suffer since the global recession, the solvency of Canadian pension plans improved sharply last year, according to Mercer. Almost 40 per cent of plans are now fully funded, compared to just six per cent at the beginning of 2013. Only six per cent of plans entered 2014 less than 80 per cent funded, compared to 60 per cent below that threshold a year earlier.

Still, only 38 per of Canadian workers, about 6.1 million, had company pension plans of any type as of 2011, according to Statistics Canada. Nearly three-quarters, or 73 per cent, of them — mostly public sector employees — had defined benefit plans. That's down from 84 per cent a decade earlier.

About one million workers were members of DC plans, up 3.5 per cent from 2010. About 85 per cent of DC plan members worked in the private sector.

In either case, the financial advisers say most workers can't just rely on pension plans to meet their retirement needs.

Those with company pensions are often left with only a few hundred dollars of room each year to purchase RRSPs. Tax-free savings accounts (TFSAs) are, therefore, a great way to invest up to $5,500 each year.

While some people take out loans in the days leading up to the RRSP deadline in the hopes of a tax refund, Merrick said the rationale makes a lot less sense than it did before 1991 when people were not allowed to accumulate unused contributions.

The best alternative is systematically invest a certain amount each month. It avoids interest charges and reduces the risk of make a large investment at the wrong time, he said.

But such moves require planning, something many Canadians are loathe to pursue. He said people are often lulled into believing their pensions and government payments will be enough for retirement without really knowing how much money they will need to fund the lifestyle they envisage.

"They have to know what they want and then work backwards," he said.

Merrick said people should be wary of putting too much money in RRSPs, a tax deferral program that could leave them exposed to a large tax bill later on and possible clawbacks on income-tested government benefits, such as Old Age Security.

While a TFSA doesn't offer any tax deduction, no taxes are paid on withdrawals and it doesn't affect government benefits.

Choosing whether to invest first in an RRSP or a TFSA depends largely on how your tax rate will change are you get older, said Golombek.

RRSPs are most advantageous for workers who expect to be in a lower tax bracket in retirement. But if your tax bracket is relatively low and is expected to remain unchanged or increase, it makes more sense to pay tax up front and invest in a TFSA.

Golombek said it's helpful to seek expert assistance to wade through personal data and develop an individualized plan.

"Only with a written plan will you be able to sleep well at night and make sure that you're going to be OK."