Increasing Your Workplace Pension

Additional Voluntary Contributions

Some pension plans (both defined benefit and defined contribution) might allow you to save extra towards your pension. This is called making additional voluntary contributions. These contributions can be taken directly from your pay, or can be made in a lump sum during the year.

Additional voluntary contributions give the same tax advantages as other pension plan contributions. This means you could save on income tax. They are also subject to the same Income Tax Act limits.

In a defined benefit plan, these contributions will usually earn the same interest rate as the pension fund.

In a defined contribution plan that offers investment choice, you can invest voluntary contributions as you wish.

Additional voluntary contributions are not subject to the same locking-in rules as employee and employer contributions. Your pension plan will specify if you are allowed to withdraw additional voluntary contributions while you are still an active member of the plan, or if you may only withdraw them on termination or retirement.

Flexible Pension Plans - Optional Ancillary Contributions

Flexible pension plans are a type of defined benefit pension plan developed in response to changes to the income tax rules introduced in the 1990s. These rules require that your RRSP contribution room be reduced by a pension adjustment. The pension adjustment is equal to 9 times the defined benefit you earn in the year, less $600. (Refer to Contribution Limits under the Income Tax Act to learn about RRSP contribution room).

The "factor of 9" approximates the value of your benefit, assuming your benefit provides for generous ancillary benefits such as indexation, unreduced early retirement, and bridging benefits. If your pension plan does not provide these benefits, the factor of 9 may overestimate the value of your benefit

A flexible pension plan allows you to make optional ancillary contributions. These contributions accumulate and are used to provide improved ancillary benefits when you terminate employment, retire, or die.

Ancillary contributions increase the overall value of your pension benefit. Because of this, they are a tax efficient means of increasing your retirement savings without reducing RRSP contribution room.

Ancillary benefits are valued using actuarial methods to determine the dollar amount that is required to provide the benefits. When you retire, terminate or die, if there are optional ancillary contributions remaining in your account after ancillary benefits are provided, you do not get a refund.

Optional ancillary contributions are subject to the defined benefit plan contribution limits set out in the Income Tax Act.

Supplemental Pension Plans

Supplemental Pension Plans are sometimes offered to executives, senior employees, or high earners of a company. If you earn more than about $125,000, you reach the limits set by the Income Tax Act for the maximum amount of tax-sheltered retirement savings or pension accrual.

To compensate for this, your employer might offer additional retirement savings outside of the company's registered pension plan. These supplemental plans try to mirror what you could have accrued within the pension plan if the Income Tax Act limits were not in place. The most common type of supplemental pension plan is a Retirement Compensation Arrangement (RCA).

Retirement compensation arrangements are not registered plans under the Income Tax Act. They are not subject to provincial pension regulation. The rules governing retirement compensation arrangements are set out in the Income Tax Act.

Funds in a retirement compensation arrangement are held in trust by a custodian. Under these arrangements, all the funds are usually provided by the employer. However, these funds are not tax-sheltered since they exceed Income Tax Act limits. That means that payments from a retirement compensation arrangement must be considered as income in the year they are received. Tax is withheld at the time of payment.

Retirement compensation arrangements are also subject to a 50 per cent rate of tax on all contributions and investment gains. This tax is refunded by Canada Revenue Agency when payments are made from the retirement compensation arrangement on a retirement or termination. Any investment returns earned by the fund are lost for this portion of the contribution as Canada Revenue Agency does not credit the refundable tax with interest.

For further information on retirement compensation arrangements, see Retirement Compensation Arrangements Guide on the Canada Revenue Agency website.