Benefits Of A Registered Pension Plan

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On top of the benefits they receive from public pensions, some Canadians will also receive benefits from employer-sponsored pension plans If you or your spouse do not have an employer pension benefit, you may wish to skip this chapter. A registered pension plan (RPP) is an arrangement by an employer to provide pensions to retired employees in the form of periodic payments. The Income Tax Act provides deductions in respect of both employee and employer contributions. There are basically two main types of employer pension plans: Defined benefit pension plan Defined contribution pension plan 7.1 Defined Benefit Pension Plan With a defined benefit pension plan, the amount of your pension is primarily defined by a set formula often based on your career earnings and years of service. A typical formula for calculating a pension in a plan based on the 5-year final average salary would be like this: Annual pension income = (2% x years of service) x (average of the last five years of income) If you have been with the employer for 30 years and the average income of your last five years is $80,000. The your pension entitlement would be like this: (2% x 30) x $80,000 = 60% x $80,000 = $48,000 Once you are vested in a DB plan, you are entitled to receive the benefits you accrue while you are a member. If you leave the company before your retirement date, you 'll usually be offered a deferred pension or a lump-sum buyout. With a defined benefit plan, companies are required by law to make
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