Registered Pension Plans (RPPs) are part of group retirement savings plan that provides substantial tax benefits for employees. Offered through employers and registered with the Canada Revenue Agency (CRA), RPPs incentivize saving for retirement through features like tax-deductible contributions and tax-deferred growth.
What is a Registered Pension Plan (RPP)?
A Registered Pension Plan (RPP) is a company-sponsored pension arrangement registered with the CRA, commonly offered as an employee benefit to provide tax-advantaged retirement savings for employees. RPPs are designed to help employees accumulate a retirement nest egg through payroll deductions over their working career.
Employees can also elect to contribute, but employer funding is mandatory. Contributions receive an immediate tax deduction while investment earnings grow tax-free within the plan. Funds are then taxed when withdrawn after retirement. This tax-deferred compound growth incentivizes retirement savings.
RPPs have locked-in rules that prevent access to funds until retirement in most cases. Assets are professionally managed and invested collectively based on the plan design. RPPs aim to provide secure lifetime retirement income through these features.
How Does an RPP Work?
Employers establish RPPs by submitting an application to the CRA. The employer selects a financial institution to administer the RPP and oversee its operation. Contribution amounts are determined based on plan rules and limits. Contributions are automatically deducted from employees’ paychecks.
In addition to the employees’ contributions, employers must also contribute to RPPs based on minimum funding requirements and plan design. Many employers choose to match employee contributions up to a fixed percentage as a form of incentive.
The contributions are then pooled and invested collectively by professional investment managers based on the plan’s statement of investment policies. Employees cannot access RPP funds until retirement in most cases. Upon retirement, funds are disbursed according to the plan’s rules and type. Tax becomes payable at this time on money withdrawn from the RPP.
Two key benefits make RPPs advantageous compared to non-registered accounts. First, contributions reduce taxable income when earning the most. Second, investment earnings grow tax-free for decades until retirement.
The RPP administrator handles tasks such as collecting contributions, investing assets, calculating benefits, distributing payouts, trust accounting, and ensuring regulatory compliance. The administrator’s fees are paid from the pension fund itself.
What are the Types of RPPs?
There are two main types of RPPs: defined benefit and defined contribution plans.
Defined Benefit (DB) Plan
A defined benefit plan provides guaranteed, predetermined retirement income for the duration of one’s life. Benefits are based on a formula including years of service and earnings.
The plan sponsor bears the investment risk. The employer must cover funding shortfalls. Actuaries set contributions to fund the promised benefits. Benefits do not fluctuate based on market performance.
Defined Contribution (DC) Plan
In a defined contribution plan, retirement income depends on the accumulated account value, which fluctuates based on market returns.
The employee and employer contribute fixed amounts as opposed to promising a benefit. Employees bear the investment risk. Benefits rise and fall based on investment performance and the amounts contributed. Contributions are typically a percentage of income. This structure offers growth potential but does not guarantee an income.
Many employers now favour defined contribution plans, which offer more predictable costs compared to defined benefit plans.
How is an RPP Different from Other Retirement Savings Plans?
While RPPs share similarities with RRSPs and TFSAs, they differ in several aspects.
| Plan | RPP | RRSP | TFSA |
|---|---|---|---|
| Employer Contributions | Required | Optional | None |
| Contribution Deductibility | Yes | Yes | No |
| Taxation of Growth | Tax-deferred | Tax-deferred | Tax-free |
| Taxation of Withdrawals | Fully Taxable | Fully Taxable | Tax-free |
| Employer Matching | Often | No | No |
| Eligibility | Employees | Anyone | Anyone |
That said, RPPs incentivize retirement savings through upfront tax relief, as well as employer funding and matching contributions. This makes them uniquely powerful savings tools.
What Happens If You Leave Your Employer?
If you leave your employer before retirement, you have several options for handling your accrued RPP benefits:
- Leave funds in the RPP – Some plans may permit maintaining your funds in the RPP if your balance exceeds a minimum amount (e.g. $10,000).
- Transfer to a LIRA – In most cases, you can transfer the commuted value of your RPP assets to a Locked-in Retirement Account (LIRA). Funds remain locked in with restrictions on withdrawals.
- Transfer to an RRSP – You may be able to transfer the commuted value of your RPP balance to an RRSP. Doing so results in a 10% withholding tax or provides an additional equivalent amount of RRSP contribution room.
- Take cash – If your RPP benefits are not locked-in, you may be able to take the commuted value in cash. Tax will be withheld.
- Deferred pension – You may be able to leave your benefits in the RPP and draw income at the plan’s retirement age.
Your entitlement to the full commuted value of your RPP benefits depends on whether you are fully “vested” when you leave your employer. Vesting refers to the minimum length of plan membership required before being entitled to full plan benefits on termination of employment. Vesting periods aim to balance employee mobility against the employer’s long-term funding commitment.
When Can You Withdraw from an RPP?
RPP funds are intended for retirement, so the rules limit withdrawals before retirement age:
- Defined benefit plans – No withdrawals are permitted. You must wait until you reach retirement age to receive income.
- Defined contribution plans – Withdrawals are also typically prohibited prior to retirement. Exceptions for financial hardship or other special circumstances may be permitted on application to the plan administrator.
Upon reaching retirement age, RPP funds can be accessed as follows:
- Defined benefit plans – You will receive a fixed lifetime pension income based on the plan’s benefit formula. This does not fluctuate with market returns.
- Defined contribution plans – You can withdraw any amount you want, provided your total withdrawals do not exceed your account balance. The amount of income depends on your accumulated account value and investment performance. Withdrawals are taxed as regular income.
The value of RPP funds is maximized by leaving them intact to grow until retirement. Premature withdrawals result in losing tax-deferred growth, so this should only be considered as a last resort.
Are There Contribution Limits for RPPs?
Contribution rules and limits differ depending on the type of RPP:
- Defined benefit plans – These plans do not have a yearly CRA limit. Contributions are based on actuarial calculations to fund the promised pension benefit. Higher salaries or shorter time to retirement may require higher contributions.
- Defined contribution plans – These plans are subject to annual contribution limits that are aligned with RRSP limits. For 2025, the maximum RPP/RRSP contribution is 18% of earned income, up to a maximum of $32,490. Unused contribution room can be carried forward indefinitely.
In addition, RPPs/RRSPs have a maximum pensionable earnings cap when calculating entitlements. For 2025, the YMPE is $71,300. Maximum contribution room and benefits are calculated based on capped income levels. YMPE increases annually with inflation.
The tables below offer an overview of historical limits over time.
| Year | DC Annual Limit | DB Annual Limit | YMPE |
|---|---|---|---|
| 2023 | $31,560 | $3,506.67 | $66,600 |
| 2024 | $32,490 | $3,610.00 | $68,500 |
| 2025 | $33,810 | $3,756.67 | $71,300 |
Contribution room not used in a given year can be carried forward indefinitely. However, overcontribution penalties may apply if you exceed the limits.
How are RPPs Taxed?
RPPs provide significant tax advantages for retirement savings:
- Contributions – Both employee and employer contributions qualify as tax-deductible expenses. This reduces taxable income in the year the contributions are made.
- Growth – Investment income and capital gains grow tax-free while inside the RPP. Taxes are only paid when funds are withdrawn from the account.
- Withdrawals – All RPP withdrawals and pension income are taxed as ordinary income at your marginal tax rate when received. Withdrawals do not qualify for capital gains treatment.
The upfront deduction on contributions combined with tax-deferred growth provides substantial tax savings compared to non-registered investing. Income taxes are deferred until you retire and withdraw funds at lower marginal tax rates.
RPPs receive the same tax treatment across Canada. The pension income credit provides additional federal tax relief on the first $2,000 of pension income. Some provinces also offer pension income credits.
Who Manages RPPs?
The plan sponsor (i.e. employer) selects a financial institution to administer the RPP. The financial institution then takes over day-to-day management and oversight of the plan.
Here are six key parties involved in RPP administration:
- Plan sponsor – The employer who establishes the plan and assumes responsibility for its oversight.
- Plan administrator – Typically, a financial institution that operates the plan. Key duties include record-keeping, asset management, benefit calculations, payments, and reporting.
- Fund manager – Invests the plan’s assets according to the statement of investment policies and procedures (SIPP).
- Actuary – Conducts valuations, recommends funding levels, and certifies the plan’s financial soundness. Required for defined benefit plans.
- Accountant – Provides audited financial statements.
- Consultants – Advise on areas such as plan design, governance, investment strategies, and member communications.
The employer retains responsibility as the plan sponsor for monitoring the plan administrator despite delegating day-to-day RPP management.
The bottom line
RPPs are powerful retirement savings tools that provide substantial tax relief while incentivizing saving through employer contributions. Understanding how RPPs work helps you maximize their unique benefits. Follow the latest rules on contributions, vesting, and withdrawals to optimize your RPP strategy. With smart RPP planning, you can supercharge your retirement readiness.
FAQs related to Registered Pension Plans
How do you qualify for an RPP?
You must be a full-time permanent employee to be eligible for an RPP. RPPs are not offered to contract, part-time or temporary workers. Eligibility may depend on your province's pension legislation and your employer's policies.
Can you have multiple RPPs?
Yes, it is possible to actively participate in multiple RPPs if you have several jobs. Each RPP is sponsored by an employer. The combined contributions cannot exceed your available RRSP room to avoid overcontribution penalties.
What happens if you outlive your RPP funds?
RPPs are designed to provide lifetime retirement income. DB plans have set benefits for life. DC plans may offer annuity purchase at retirement to guarantee income. If you fully deplete DC assets, you may only have government benefits left.
Is RPP income taxed differently than employment income?
No, RPP income is taxed as regular income for federal tax purposes. Some provinces do offer pension income credits which reduce tax on a portion of RPP income. RPP withdrawals do not qualify for capital gains treatment.
Can self-employed individuals establish an RPP?
No, RPPs are for company employees. Self-employed persons cannot set up an RPP but can establish an individual pension plan (IPP) with similar rules. An IPP has higher setup and administration costs than an RPP.
What happens if you die before retiring and withdrawing your RPP?
Your RPP benefits can pass to your surviving spouse as a death benefit if you predecease retirement. Alternatively, your RPP contributions may be paid to your estate or designated beneficiaries. Estate taxes may apply.
