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“You shouldn’t have an RRSP if you already have a pension plan.”
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“With a pension plan, RRSPs are useless.” Here’s how to respond to this common misconception.
RRSPs and Pension Plans: Opposition or Strategic Alliance?
It’s common to hear that contributing to an RRSP when you already have a pension plan is unnecessary, even pointless. This perception often stems from an oversimplified idea: “Why would I need another plan if my employer already provides me with a pension?” In reality, the situation is more nuanced. In many cases, the two plans are not only compatible but also complementary.
Understanding the Rules of the Game: The Pension Adjustment
When an employer offers you a defined benefit or defined contribution pension plan, a Pension Adjustment (PA) is recorded on your tax file. This factor reduces your RRSP contribution room to account for the benefits you’re already receiving through your pension plan. This doesn’t mean you can’t contribute to an RRSP only that your available room is slightly lower than the normal maximum.
It’s therefore a mistake to believe that an RRSP becomes inaccessible or irrelevant because of the existence of a pension plan. The RRSP remains a valuable tax tool to complement your savings.
A pension plan doesn’t guarantee your financial security
Even though a pension plan can provide a stable retirement income, it is rarely sufficient on its own to cover all financial needs in retirement. In fact, benefits are often calculated as a percentage of the average salary from the final working years, not the actual salary at the time of retirement. This can create a significant gap to fill in order to maintain your standard of living.
In addition, unexpected expenses, healthcare costs, or financial support for loved ones may require more liquidity than a pension plan can provide.