Should you make RRSP contributions if you have a pension?

I made regular RRSP contributions every year for the decade I spent working in the private sector, where I took advantage of my employers’ matching contributions and built up a decent portfolio.

Three years ago I changed careers, moving into the public sector with a defined benefit pension plan, and I haven’t made any RRSP contributions since. Here’s why:

The main reason for limiting RRSP contributions when you belong to a pension plan is that you simply won’t have as much contribution room.

An Ontario teacher with an $80,000 annual salary contributes $735 per month towards their defined benefit pension. This works out to slightly more than 11 per cent of their salary.

The annual RRSP deduction limit is reduced by the pension adjustment, or PA. This is a complex formula for defined benefit plan holders, but the end result is a big reduction in available RRSP contribution room each year.

Using the pension adjustment formula, this Ontario teacher will have their RRSP deduction limit reduced by $13,800 next year, leaving only $600 in available RRSP contribution room.

It’s worth looking into how much your pension adjustment affects your RRSP deduction limit to determine if you should take advantage of this contribution room each year. 

In my case, I’m left with about $3,500 in available RRSP contribution room this year after my pension adjustment. This amount is significant enough for me to consider maxing out my RRSP contributions before this years’ deadline.   

Members of defined benefit pension plans have the luxury of knowing they will be receiving 40 to 60 per cent of their working salary once they retire. However, for some people, having additional savings in an RRSP is also important to supplement their retirement income.

It’s important to note that you will begin withdrawals from your RRSP in the year you turn 72. At that time, it’s possible that you could be earning more income in retirement than you were earning during your working years, meaning that you could be paying more in taxes as well.

In this case you should consider contributing to your tax-free savings account (TFSA) rather than maxing out your RRSP. The TFSA will allow you to top up your savings during your working years, and give you the flexibility to make withdrawals on your own terms in retirement, tax free.

Also Read:

RRSP vs. Tax-free savings: Which is best?

We need a $2M lifetime RRSP limit

Robb Engen is half of the Boomer & Echo personal finance blogging team with his mother, a former financial advisor.  Reach him at robbengen@gmail.com