'

DOLLARS AND SENSE

New pension
plan rules
good news
for workers

S 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 belong-
ing toa pension plan is wor-
thwhile.

People usually join the pension
plan at work. Then, when they
change jobs, they might receive
back the money they had con-
tributed 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
contributions even if you do
chznge 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 |
can put more into my RRSP?”

In some cases, ves — provided
you do indeed make those max-
imum 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 pian.

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

“Try to take a long-term view
with pensions.” said John Beaton,
senior vice-president and con-
sulting actuary with The Alex-
ander Consulting Group.

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

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

There are two basic types of
pension plan: (1) defined benefit
and (2) money purchase (some-
times called defined contribution).

{h) Most Canadians belong to a
defined benefit plan. You are
guaranteed a certain pension (the
“defined benefit’) which is usual-
Ivy based on your income and
length of employment.

(2) A money purchase plan sets
out how much toney will be con-

MOI

Wednesday, February 6, 1991 - North Shore News - 27

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tributed (the ‘defined contribu. a
tions’’), The pension you receive
depends both on how the pension
fund performs under various in-
vestment conditions over the years
and also on interest rates when
you retire and want te start your
pension income through buying an

“annuity.

“The main advantage of joining
@ 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

er. —: .
Se
ty
: arene:
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—— ee

SS eae

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qualify for vesting, you won't be
entitied to the employer’s con-
tributions. And you will have
given up RRSP scope and flex-
ibility.”

Stili, Beaton added, ‘‘flexibility
can be an enemy to financial se-
curity. If you are not in a pension

POA
as

plan, if is easy to buy a new car
or g0 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 serious-
ly 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
guaranteed benefit — a guarantee
you cannot get with either a
money purchase plan or RRSPs.

The longer you stay with your
employer and pension plan, the
greater your benefits — ‘tin some
cases, the total plan value can be
as much as five to 10 Simes your
annual salary at retirement,"’
Beaton said.

Some plans offer enhanced
benefits: 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).

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

“Still,’’ said Beaton, ‘‘losing
out on RRSP contribution
possibilities isn’t always a major
tragedy. Using the money instead
to pay off your mortgage, for ex-
ample, can also be an important
financial planning opportunity."

Mike Grenby is a Vancouver-
based columnist and independent
personal financial adviser who will
answer your questions as space
allows in his column. Write to

him c/o North Shore News, 1139
Lonsdale Ave., North Vancouver
V7M 2H4.

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