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Inside the Market We have a defined benefit pension – should we still use RRSPs?

Defined benefit pension plans offer a huge retirement saving advantage to a fortunate 25 per cent of the workforce. But let’s not overstate the wonders of DB pensions. You still need to save on your own.

“My spouse and I are in our 30s, and both of us have defined benefit pension plans,” a reader said recently in a question she submitted to my e-mail newsletter, Carrick on Money. “Should we still be putting money into RRSPs?”

In today’s workforce, it seems unwise for people in their 30s to count on being with the same employer for their entire career. Employers are less loyal than they used to be, and young people seem to value change and variety in their working lives. The net result is that the DB pension you contributed to in your 30s could be a distant memory by the time you turn 50.

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This is where personal retirement savings come in. Contributing to a DB pension will limit the amount of money you can add to an RRSP, but there should be some room at least. Tax-free savings accounts are a good alternative and/or supplement to RRSPs. This year’s TFSA contribution limit is $6,000 and it applies to everyone aged 18 and older, regardless of their personal finance situation.

TFSAs can be used for any savings or investing goal you can imagine – emergency fund, home down payment, vacation of a lifetime and retirement. The benefit of using them for retirement is that you can withdraw money tax-free. Unlike RRSP withdrawals, money taken out of a TFSA is not added to your income. This means that TFSA withdrawals will not trigger a clawback of Old Age Security or Guaranteed Income Supplement payments.

Another issue with DB plans is that they don’t guarantee a well-funded retirement. Some plans require aggressive levels of contributions from workers and their employers, others less so. And while DB plans are built on the idea of paying plan members cash for life after they retire, it’s not unheard of for these plans to come up short if an employer runs into financial problems. Sears Canada’s recent bankruptcy has resulted in workers receiving lower pension payments than they expected.

A DB pension is a great foundation for retirement saving, even if you only participate for a few years. But for most people, a DB plan alone won’t be enough. Whether it’s through RRSPs, TFSAs or both, you need to save on your own.

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