A pension plan is a valuable component to any retirement plan. If you are participating in a pension plan at work, you should be receiving a pension plan statement at least annually from your pension plan provider illustrating the performance of your pension plan. Read your statement carefully, often it will include an estimate of the projected income you could expect at retirement.

Pension plans are subject to government regulations and pension jurisdiction. It is important that you understand the benefits and limitations of your pension plan so you can best plan and prepare for the day you will begin using it.

Typically, there are two types of registered pension plans:

1. DBPP (Defined Benefit Pension Plan):

This kind of plan is managed by your company and you don’t have control over investment allocation of your contributions. Your retirement income is a reflection of a formula which generally includes a combination of years of service, age and percentage of income (based on your top income earning years) among other factors.

The annual statements indicate the benefit you will receive on your retirement date. However, they are expensive to afford and subject to scrutiny due to potential unsustainability.

2. DCPP (Defined Contribution Plan):

Unlike DBPP, your retirement income is not determined; however, DCPP gives you more control over your investments because you can create your own individual portfolio suited your tolerance of risk.

You can expect to receive your retirement income based on your age and the accumulated balance achieved in your plan. Contribution rates are generally reflected as a percentage of earned income, matched by the employer.

For example: if you contribute 3% of your earnings, your employer would match with an additional 3%, bringing the total contributions up to 6%.

DCPPs are becoming more popular as they can be tailored to the fit an organization’s budget, and giving flexible income options to employees when they reach retirement.

Besides DCPP and DBPP, there are other employer-sponsored plans offered including DPSP (Deferred Profit Sharing Plans) and Group RRSPs, and a variety of retirement plan options are available to those who decides to leave their place of employment.

Understanding your retirement plan and having an investment strategy around it will give you the desired outcome in terms of income, lifestyle, financial strength and comfort.