Even with a myriad of other options, the RRSP is still is the cornerstone of retirement savings for most Canadians, although they may not be using it to its fullest advantage.
The newest retirement savings vehicle on the block is the Pooled Registered Pension Plan (PRPP). Designed to help the estimated 3.5 million Canadians who do not have employer-sponsored pension plans or RRSPs, the PRPP would be a great adjunct to the RRSP if and when it comes formally into being.
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“At the moment we don’t know a lot about the environment of the program because Ottawa and the provinces are still making their decisions about it,” says RColin Montgomery, a financial advisor and Certified Financial Planner with Edward Jones & Co. “PRPPs alone probably will not be enough when it comes to retirement planning and individuals will need advice based on their own financial situation.”
A PRPP is a defined as a contribution pension system offered by a third-party financial institution such as a bank or insurance company. The plan administration and fiduciary duty will be the responsibility of the financial institution, making it fairly easy for small- to medium-sized companies to set one up.
There likely will be some major differences between RRSPs and PRPPs.
PRPPs, for example, are locked-in until the age of 55 at the earliest, and in some provinces that may be as high as 65.
Unlike RRSPs, you can’t get your money out of a PRPP once it is in, and therefore you could not take advantage of programs like the Home Buyers’ Plan, which allows you to withdraw up to $20,000 to buy your first home, or to take out money tax-free for post-secondary tuition costs.
As well, you may not have as many investment options as you do with an RRSP. The actual investment guidelines will be set by the government and then individual plan administrators will offer products that meet those guidelines for investors to choose from.
Contribution limits to a PRPP are the same as to your RRSP but cannot exceed your overall allowable limit. If you have $30,000 of RRSP contribution room, you could make any contributions to both plans as long as the total does not exceed $30,000.
“At the moment we don’t know how the plan will be administered and how advice will be offered,” says Montgomery. “The government sets the options, the administrator sets the products and the investors make the choice.”
Statistics show that Canadians are saving less than four per cent of their disposable income and, despite the billions of dollars invested in RRSPs and Tax-Free Savings Accounts (TFSAs), they have plenty of room to add more to their retirement plans.
For example, only 26 per cent of eligible tax filers contributed to an RRSP in 2010. While total RRSP contributions in 2010 rose to $33.9-billion, up from $33-billion in 2009, the total amount that Canadians were entitled to contribute in 2010 grew to $717-billion from $671-billion in 2009.
Twenty-one million Canadians have a total of $632-billion in total unused RRSP contribution room.
“Vehicles like the TFSA and the PRPP are giving people a further incentive to save for their retirement,” Montgomery says. “They all are good adjuncts to the RRSP, but people need to look at the own individual situation and decide what the best options are for them.”
