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Insights & advice

DCPP, DBPP and employer pension withdrawal rules

Key takeaways

  • You can’t withdraw the money in a DCPP before you retire (age 55 or older)

  • However, there are some instances where withdrawals may be permitted by law

  • With a DBPP, if you leave your employer before you retire, you can take the commuted value of your pension out and invest it yourself, in a locked-in account

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Example of a defined contribution pension plan (DCPP)

Let’s consider Cary, who opts to join the DCPP at the company they work for. They contribute $2,000 a year to the plan and the employer matches that contribution by 100%, so the total annual amount invested on Cary’s behalf becomes $4,000.

It’s Cary’s responsibility to contribute to the plan and choose how that money is invested. The employer only has to match Cary’s contribution up to the predefined limit.

If Cary leaves that employer after a few years and goes to another employer who offers a DCPP, they can move the amount from one plan to the other. Cary can continue building a retirement nest egg.

Cary’s investments stay in the DCPP until retirement. Let’s assume that they’ve totalled $450,000 by age 71. Cary can withdraw the amount in the plan, then receive it in annuity payment, and/or invest it in a life income fund (LIF) or locked-in retirement income fund (LRIF).

The above example is for illustrative purposes only. Situations will vary according to specific circumstances.

Withdrawing from a DCPP

You can’t withdraw the money in a DCPP before you retire. The earliest retirement age depends on the plan provisions and is 10 years before the normal retirement age under the plan.  If the normal retirement age is 65, the earliest you can retire from the plan is age 55.

Can you transfer a DCPP to an RRSP?

On your termination of employment, you can only transfer to:·

  • A locked-in retirement product allowed under pension legislation
  • An insurance company to buy a deferred annuity
  • Another employer’s pension plan

If you made voluntary contributions to your DCPP, or the amount qualifies as a small amount under pension legislation, you can transfer that money to a registered retirement savings plan (RRSP).

Can you withdraw from a DCPP due to an emergency?

In certain provinces you may be able to withdraw the funds due to financial hardship.  You should speak with an advisor first. Other options may be available. 

While you are employed, unless the pension legislation allows otherwise, you cannot withdraw from or “unlock” pension funds. 

Some provinces and the federal government have reasons that permit you to unlock locked-in pension funds. Some of those reasons include:

  • Low income
  • Potential foreclosure·
  • Eviction for behind in rent
  • First month’s rent and security deposit
  • High medical or disability-related costs
  • Shortened life expectancy 

In addition, some jurisdictions let you unlock 50% of your locked-in funds, 1-time, if you’re 55 years of age or older. If you leave a job or retire, some jurisdictions also let you unlock if the balance of your funds is below a certain amount. 

Check your pension documentation to confirm your options.

What’s the difference between a defined contribution plan and a defined benefits plan?

Defined contribution plan    

Defined benefits plan

Overview

You know how much is going into the plan

You know how much you’re going to get out of the plan

How is your retirement income determined?

Depends on the market and how much your investments have earned when you retire

Determined by a formula, based on how long you’ve worked and your average earnings in your best years

What do you contribute?

Usually a percent of your income (maximum 18%)

You may or may not contribute – if you do, you’re usually required to pay less than half of the benefits

What does your employer contribute?

Usually a percent of the employee’s income (maximum 18%)

Employer must usually contribute at least half of the benefits

How do taxes work?

The money you contribute is tax-deductible

The money you earn from investments won’t be taxed until you withdraw it

The money you contribute is tax-deductible

The money you earn from investments won’t be taxed until you withdraw it

Learn more about defined benefits plans

What’s next?

Now that you understand more about the types of pension plans and their withdrawal rules, you may also want to:

  • Confirm with your employer which type of pension plan you have

  • Talk with your advisor about whether your pension plan will meet your retirement needs

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The information provided is based on current tax legislation and interpretations for Canadian residents and is accurate to the best of our knowledge as of the date of publication. Future changes to tax legislation and interpretations may affect this information. This information is general in nature and is not intended to be legal or tax advice. For specific situations, you should consult the appropriate legal, accounting or tax advisor.