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What is a pension?

A pension[@tax-advice2] could be the key to living the way you want, later in life.

Whether you crave simple comforts or all-out adventure – the sooner you start saving into a pension, the more options you’re likely to have when you stop working.

How do pensions work?

A pension is a way to invest in your future, by helping you build up savings for when you retire. Essentially, it’s a long-term savings scheme.

The earlier you start building your pension pot, the more time it’ll have to grow. However, like all investments, there’s also a risk you may get back less than you put in.

Depending on the type of pension you have, it may work like this:

  • you and your employer, or just your employer, pay into it each time you get paid
  • the government also ‘contributes’ to it in the form of tax relief, reducing the impact on your take-home pay
  • the money is invested, giving it the potential to grow further
  • you’ll be able to access the money you’ve accumulated on a set date – normally once you stop working and have retired (from age 60+)

Explore: Retirement planner[@retirementplannerdisclaimer]

Why should you have a pension?

Whether you’re planning to give up work completely, or just reduce your working hours, you’ll need money to live on day-to-day. So it’s a good idea to pay into a pension, if you can.

Starting your pension savings early can help give you more options and the potential for financial freedom in years to come.

There are other ways you can save or invest for your future, but pensions are considered the best option for most people because of:

Employer contributions

Your employer will pay into your pension if you’re enrolled on the employer pension plan. This is a great way to boost your pension pot.

Tax-free savings[@tax-advice2]

If you’re saving into a Registered Retirement Savings Plan (RRSP), you don’t have to pay tax on the contributions you make, or gains you earn, until you withdraw the funds. A RRSP also reduces your taxable income.

There are limits on how much you can contribute to your RRSP.

You could also consider a Tax-Free Savings Account (TFSA). Contributions are not tax deductible. Like a RRSP, the income and capital gains earned are tax-free. And while you can use a TFSA to save for retirement, you’ll be able to withdraw money without a penalty, if you need it.

There are annual and lifetime contribution limits to a TFSA.

Passing on your wealth

Depending on the type of pension you have, you may be able to choose who will receive your pension when you pass away.

Different types of pensions

Employee pension plan

Your workplace may offer an employee pension plan. This is a registered plan, where both you and your employer (in some cases, just your employer) will make regular contributions.

There are 2 main types of plans offered by employers:

  • defined contribution pension plan (most common nowadays)
  • defined benefit pension plan

Your employer will be able to give you more information about the pension options they have. You’ll then be able to decide if it’s something you want to take advantage of, or look at your other options.

Government pension plan

The Canada Pension Plan (CPP) / Quebec Pension Plan (QPP) replaces part of your income when you retire. It’s a monthly, taxable benefit which you’ll receive for the rest of your life.

The amount you receive is based on several factors, including:

  • how much you earn and contribute throughout your working life
  • the age you plan to receive your CPP payment / QPP payment

The amount you receive can also be affected by other things, such as the amount of time you’ve spent out of the workforce caring for young children.

You’ll need to apply, and qualify, for the CPP / QPP to be able to receive this.

Old Age Security (OAS) is a pension you can receive if you're 65 and over, and have lived in Canada for at least 10 years. If eligible, this pension is available even if you've never worked.

Private pension

You may want to start your own retirement savings, alongside an employer pension plan, or instead of one.

It’s up to you to choose your provider, as well as how often and how much you contribute (within the annual limits). If you’re not sure which provider or option to choose, it can be useful to get financial advice.

As with all investments, the value of your pension can go down as well as up, and you may get back less than you paid in.

The pension providers may charge a fee for managing a private pension. It's important you’re aware of the costs as they can eat away at your pension pot.

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Which pension is right for you?

It makes sense to take advantage of your employer’s pension plan, if you can. But, if you don’t think your employer’s scheme is right for you, or you’re self-employed, you may want to look at opening a private pension, or long-term investments.

The CPP and OAS may not be enough on its own, so you may want to consider this a buffer.

When should you access your pension?

It’s best to hold off accessing your pension for as long as you can afford to – at least until you stop working full time. This gives you as much time as possible to make payments into it, and for it to grow.

Depending on the type of pension you have, you may be able to start accessing it at age 60.

There may also be circumstances when you can take your pension early, for example if you become seriously ill or unable to work.


It pays (literally) to make the most of your pension, whichever type you have.

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