What is a Registered Pension Plan?

A registered pension plan is a retirement benefit provided to an employee of a company by an employer at the time of retirement. Monetary contributions are made to the plan for the duration of time that the employee is working at the company, usually by both the employer and the employee. At the time of retirement, the employee is able to access the pension benefits.

A pension plan is an agreement between an employer and employee that arranges for an income to be paid to the employee upon retirement. It is a form of a savings account specifically for retirement that is not taxed until the time that the money is used. A pension is typically paid out after retirement in lump sum amounts. A registered pension plan is only one of many types of retirement savings plans available.

A registered pension plan is similar to that of a trust, which is a specific type of plan that is protected from certain tax laws. In the case of a registered pension plan, this trust is registered with the government at the time it is set up and the monetary contributions are provided when the employee reaches retirement eligibility. Tax is usually deferred on the contributions as well as any revenue generated during the period of time that the employer and employee are actively paying into the plan. At the time of retirement, the contributions become taxable income once they are withdrawn.

Certain rules must be followed to register a pension plan, which include that the benefit plan must be provided by the employer and the terms of the plan must be written out and communicated to all parties. The written plan must clearly state the formula used for calculating the retirement benefit. A registered pension plan cannot be used as a savings account or a loan option; rather it must be used for retirement benefits only.

Employers must contribute to the plan a minimum of one time annually in an amount that is the equivalent of that year’s worth of benefits. All contributions are irrevocable, meaning they can't be amended, modified, changed or revoked. The only way an employer can get a credit back after making a contribution is if an employee is terminated. If termination does occur before retirement, the employer would get that year’s surplus contributions returned, if applicable. Typically, an employee must be working for a company for a certain amount of time before becoming eligible to participate in an employer sponsored registered pension plan.

While there are a number of types of registered pension plans, they can all be grouped into two main categories, which are defined contribution plans, known as money purchase plans, and defined benefit plans. Although plans may differ slightly depending on the employer, all registered pension plans fall into one of these two groups. Some employers may offer a combination of these two plans, which are known as hybrid plans.

The defined contribution plan is a plan where the employer and the employee both contribute, and the contributions are invested on behalf of the employee. The amount that the employee gets at retirement will not be a predetermined amount; instead how much the investment earns will affect the balance after any gains and losses. The value of this plan can fluctuate, so the amount of the retirement benefit will also vary.

Defined benefit plans typically require a contribution by both the employer and the employee, and the payout at retirement is based on a formula. This formula is based on the contributions, monthly income, and years of service of the employee. The contributions are not invested, but rather put into a trust and saved for retirement. This means that the exact amount of the retirement benefits is known prior to the time of retirement.