For Canadians lucky enough to have a pension plan where they work, they often wonder if it makes sense to also contribute to an RRSP.  The answer?  It depends.

This article will outline 3 important factors to consider when deciding if you need an RRSP.

1. How Good Is Your Pension Plan?

This is the most important factor to consider. Is It Defined Contribution (good) or Defined Benefit (better)?  Is it well funded and safe?

If you have a government-backed pension (ex. nurse, fire/police, civil servant, etc.) and plan to work until you qualify for full benefits, then the choice is pretty clear: you should not utilize RRSPs until you have all debts paid off and have maxed out your Tax Free Savings Account.

An RRSP in such a case will likely attract a high rate of taxes (due to the higher income provided by your pension) and possible clawbacks from government programs and tax credits, making it less attractive than other options.

If you have a less secured pension or one that will not pay you a guaranteed decent income for life, then the decision becomes more difficult.

You’ll have to look at what you expect your income to be in retirement and the effect that cashing in RRSPs will have on that (as RRSP withdrawls will count as income, possibly lifting you into a higher tax bracket).

If the effect will be minimal and you’re in a higher tax bracket now, then RRSPs might make sense.  It can be a bit of a gamble, though, so I generally still recommend such people to pay off debt and fill their TFSA before the RRSP.

2. When Will You Retire?

This can change everything.  If you plan to retire before you begin to collect pension benefits, you could potentially burn through your RRSPs during that period, withdrawing them during years when you have no other income meaning a lower tax rate.

In this case, when contributing to RRSPs during high income years and withdrawing them during low income years, RRSPs can be a very good choice. See our article on Why RRSPs Are Beneficial for Low Income Canadians for reasons why RRSPs are advantageous during low income periods.

3. How Long Will You Work For?

If you expect to not work your entire working life in a position that has a good pension (meaning you plan to change careers), then this also affects the RRSP decision.

What to do will depend on where you plan to go next.

Closing Points

Hopefully that gives you some food for thought on how to best allocate your hard earned money!

For more information on where to best allocate your money and general investment ideas, see our articles listed under investments.