Pension plans are a component of Canada’s retirement income system. Understanding how they work helps you make smart choices for your future.
A pension is regular income you receive after you retire from work or reach a certain age. It is meant to help replace part of your employment income and provide financial security in retirement.
Canada’s retirement income system is built on three main sources, often called “pillars,” that work together to support people in retirement.
The first pillar provides basic income to seniors based on age and how long they’ve lived in Canada. It includes benefits like Old Age Security (OAS) and income top ups for low income seniors. These programs are paid for through general tax dollars and are meant to ensure a minimum level of financial security in retirement.
The second pillar includes the Canada Pension Plan (CPP), or the Quebec Pension Plan (QPP) in Quebec. These are mandatory plans—workers and employers must contribute while people are working. Retirement benefits are based on how much someone earned and contributed over their career. CPP and QPP are not paid for by taxes, but by those contributions and investment income.
The third pillar is made up of workplace pension plans and personal savings, such as RRSPs and TFSAs. These are generally voluntary, but the government encourages people to use them by offering tax advantages, like tax deductions or tax free growth. This pillar allows individuals to save more to support their own lifestyle in retirement.
Together, these three pillars help provide Canadians with a mix of basic income, earnings based pensions, and personal savings for retirement.
Government benefits and public pensions are a great starting point, but they likely won’t cover all your expenses. Make sure you have a plan to fill the gap—through workplace pensions, Registered Retirement Savings Plans (RRSPs), and/or other savings.
Learn more about Government of Canada’s retirement programs at Public pensions - Canada.ca
Workplace pension plans are an important source of retirement income for many employees. If you’re a member of a provincially regulated pension plan in New Brunswick, your pension plan is governed by the rules of the Pension Benefits Act. These rules ensure:
Your plan is managed prudently
You receive clear information about your benefits
You have options if your job or plan changes
If your workplace doesn’t offer a pension plan, you still have options. RRSPs and Tax-Free Savings Accounts (TFSAs) are two ways to save for retirement on your own terms. Even if you participate in a workplace pension plan, you may wish to talk to a registered financial advisor or planner. They can help review your financial situation and financial goals, to figure out if your pension benefit will support your desired retirement lifestyle—or if you should save more. To learn more about federally regulated savings programs like RRSPs or TFSAs, visit Government of Canada.
In New Brunswick, there are different types of workplace pension plans. The most common ones are defined benefit plans (DB plans), defined contribution plans (DC plans) and shared risk plans (SRPs).
A DB plan promises a set benefit (income) at retirement. The benefit is calculated using a formula, often based on your salary, years of service, age, and other factors—not on investment performance. In a DB plan, the employer or plan sponsor assumes all the investment risk and portfolio management responsibility. It can be contributory (employees and employers make contributions) or non-contributory (only the employer contributes).
In a DC plan, the final benefits (your retirement income) depend on the contributions made and the performance of the money invested in the plan. The employee assumes the investment risk and longevity risk (the potential to outlive your pension income), not the employer or plan sponsor. The employer or both employer and employee contribute fixed amounts which are invested on the employees’ behalf. The investment choices and portfolio management are also often the employee’s responsibility.
See the CAPSA Member Guide for DC Plans for help making informed decisions.
An SRP is a type of target benefit plan designed to balance stability and flexibility. Key characteristics of an SRP are:
fixed contributions (or variable only within a narrow, pre-determined margin),
targeted benefit at retirement,
benefits can be adjusted and reduced if necessary to balance the plan’s funding,
mandated risk management principles to help ensure the targeted benefits can be provided in the vast majority of economic scenarios.
There are two types of benefits under an SRP:
Base benefits must be funded so that there is a 97.5% probability that they will not be reduced over a 20-year period.
Ancillary benefits must be funded so that, on average, at least 75% of their targeted value will be paid over the same 20-year period (example, cost of living adjustments).
Generally, both employers and employees contribute, but employees pay no more than half of the total amount of contributions. The plan’s financial health is reviewed annually, and predefined steps are taken if deficits or surpluses occur.
If you leave a job before retirement, what happens next depends on your plan, your age, and whether you are vested -- the point when your pension is yours to keep, even if you leave your job.
Vesting occurs at a minimum on five years of continuous employment or two years of pension plan membership—whichever is sooner. Some pension plans may have more generous provisions and provide for earlier vesting. You can contact your pension plan administrator to confirm when you qualify.
When leaving a job before retirement age, you have the following choices:
You may choose to defer your pension, meaning you can leave your pension in the pension plan until you are ready to receive it.
If you’re moving to a new job with a pension plan, you might be able to transfer your benefits to the new plan.
Locked-In Retirement Account (LIRA): Sometimes called a “locked-in RRSP”, a LIRA holds pension funds you've earned from a workplace pension plan until you're ready to start receiving retirement income. Funds in LIRAs continue to be invested and are subject to investment risk. You can’t take money out of a LIRA like a regular savings account, except in very specific circumstances.
Life Income Fund (LIF): A LIF is a type of retirement account that pays you income each year. It has rules about how much you must take out (a minimum) and how much you’re allowed to take out (a maximum). These limits help your money last through retirement.
A life annuity is an insurance product that gives you regular payments for life. You buy it with a lump sum—using your pension funds or other retirement savings—and it guarantees retirement income, no matter how long you live. There are different types of annuities, so it’s important to fully understand how the annuity works before deciding if it fits your needs.
If you leave a job and end your membership in a pension plan before you are vested, you are entitled only to a return of the money you personally contributed—plus interest.
Your plan administrator must send you a pension statement within 30 days of your employment ending. This statement outlines your benefits and options. You’ll usually have 90 days to make a decision about what is done with your pension benefit. Read the Financial and Consumer Services Commission’s Guide to Pension Transfers and Withdrawals in New Brunswick to learn more before making your decision.
If you transferred your pension funds to a LIRA or a LIF, you may be able to withdraw the balance or a portion of your account early if you qualify for an unlocking provision. These provisions have strict rules. Read the Commission’s Guide to Pension Transfers and Withdrawals in New Brunswick, or speak to your financial institution to learn more about early withdrawal.
An employer or plan sponsor, in most cases, can choose to terminate a pension plan at any time. This is called winding up the pension plan and it is overseen by the Superintendent of Pensions. Visit The Financial and Consumer Services Commission to learn more about pension wind-ups.
Your pension is one of the most important parts of your financial future. Whether you’re counting on it to cover basic expenses or to support a comfortable lifestyle, understanding how it works helps you make confident decisions.
If you’re unsure about how your pension works or what steps to take when reaching retirement, contact your pension plan administrator. They can explain your benefits and help you understand your options. You can also speak with a registered financial advisor or planner to make sure your pension fits into your overall retirement plan.
If your employer does not offer a pension plan, you should consider alternative ways to save for retirement—such as RRSPs or other investments.