Business

TheReview Wednesday, February 20,1991 — A20

Get a better return from pensions

Is a pension plan a good thing?
If you have retired and now are
receiving a regular pension cheque
every month, you are probably
glad you belonged to the plan. But
if you are in the workforce, you
might wonder if belonging to a
pension plan is worthwhile.

People usually join the pension
plan at work. Then, when they
change jobs, they might receive
the money they had contnbuted to
the plan — and find to their
dismay it has been earning only
two or three per cent interest.

New rules are making it easier
to get a better return on your
money, to transfer pension credits
and to benefit from employer con-
tributions even if you do change
jobs.

“But,” you might ask, ~ with the
higher RRSP contribution limits,
wouldn’t I be better off to stay out
of a pension plan so I can put more
into my RRSP?”

In some cases, yes — provided
you do indeed make those maxi-
mum RRSP contributions year
after year. But pension reform has
created a more level playing field.
So in most cases, the total retire-
ment saving contribution limit is
the same, whether or not you
belong to a pension plan.

The main advantages of a pen-
sion plan are employer contribu-
tions and with the majority of
plans, a guaranteed pension
income.

“Try to take a long-term view
with pensions,” said John Beaton,
senior vice-president and consult-
ing actuary with The Alexander
Consulting Group.

“Tt is sad to see employees who
stayed out of company pension
plans and then remained with the
employer until retirement.

“They could have had secure
retirement income largely
financed by their employers.
Instead, they end up with far less
than their counterparts who joined
the plan.”

There are two basic types of
pension plans: 1. defined benefit
and 2. money purchase (some-
times called defined contribution).
1. Most Canadians belong to a

defined benefit plan. You are guar-
anteed a certain pension (the
“defined benefit’) which is
usually based on your income and
length of employment.

2. A money purchase plan sets

out how much money will be
contributed (the “defined contri-
butions’). The pension you
receive depends both on how the
pension fund performs under vari-
ous investment conditions over the
years and also on interest rates
when you retire and want to start
your pension income through buy-
ing an annuity.

“The main advantage of joining
a money purchase plan is that you
gain benefits financed by employer
contributions,” said Beaton.

“However, if you do not stay
with the employer long enough to
qualify for vesting, you won’t be
entitled to the employer’s contri-
butions. And you will have given
up RRSP scope and flexibility.”

Sull, Beaton added, “flexibility
can be an enemy to financial
security. If you are not in a pension
plan, it is easy to buy a new car or
go for a vacation and not have
enough money left over to make
your RRSP contribution.

“So if you do not have the
discipline to be sure you will keep
to a program of regular RRSP
contributions, you should seri-
ously consider joining an
employer pension plan — unless
you have already accumulated
substantial wealth.”

With the more widespread
defined benefit pension plan, you
normally gain both the employer’s
contributions and the security of a

‘In some cases, the fofal plan
value can be as much as five fo 10
times your annual salary at
retirement’

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COLUMBIA
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guaranteed benefit — a guarantee
you cannot get with either a
money purchase plan or RRSPs.

The longer you stay with the
employer and pension plan, the
greater your benefits — “in some
cases, the total plan value can be
as much as five to 10 times your
annual salary at retirement,”
Beaton said.

Some plans offer enhanced ben-
efits: indexation to help counter
the effects of inflation, little loss of
income if you retire early, a good
level of “survivor” income for a
widow(er).

Younger employees who change
jobs frequently tend to lose the
most if they belong to pension
plans: they may receive low bene-
fits and have their RRSP limits cut
back sharply.

“Sull,” said Beaton, “losing
out on RRSP contribution possi-
bilities isn’t always a major tra-
gedy. Using the money instead to
pay off your mortgage, for exam-
ple,. can also be an important
financial planning opportunity.”

Mike Grenby is a Vancouver-
based columnist and independent
personal financial adviser; he
will answer your questions as
space allows in his column —
write to him c/o The Review, P.O.
Box 2070, Sidney, B.C. V8L 3S5.

STRAIGHT TALK |

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