RPP, RRSP OR TFSA? Workplace Pensions Have an Effect on Savings

Do RPPs and RRSPs act as substitutes for one another in retirement savings patterns? At first glance, this appears to be so, based on a new study released this week by Statistics Canada. The big finding is that workers who are self-directed savers benefit less than their co-workers who don’t tend to save enough for retirement when RPP contributions automatically increase.

As a result, pre-retirees and their tax and financial advisors may wish to take a greater interest in changes to employer-sponsored pension plans, in measuring savings capacity for other vehicles such as RRSPs or TFSAs.

Among workers with annual earnings near the Canadian average, a $1.00 automatic increase in Registered Pension Plan (RPP) contributions results in an average reduction in Registered Retirement Savings Plan (RRSP) contributions of $0.55. The net result is that the sum of RPP and RRSP contributions increased by an average of $0.45 across workers with different propensities to save.

So, it can be concluded that assisted or compulsory retirement savings programs at work increase net savings for workers who save the least on their own. But for regular savers, increases in RPPs direct savings away from other vehicles; in other words, the extra money going into an employer assisted plan simply redirected money that would have gone to self-directed savings. The study did not comment on how an automatic increase in RPP savings affected other savings opportunities, like the TFSA.

This is interesting financial behavior. Is there an actual cash flow limit – when increased compulsory savings are implemented – that thwarts other savings opportunities which may have better benefited the client in the future – tax free savings in a TFSA, for example? Tax and financial advisors and their clients who are concerned about the level of tax free retirement savings their clients can accumulate for the future may want to take note of this in start-of-year investment and retirement planning.

In the meantime, to begin the deliberations on how and where to save before the end of the year and in 2016, both independent savers and advisors may wish to weigh in on this month’s opinion poll at Knowledge Bureau on the issue, too. The question is: “Should Canadians top up their TFSA before maximizing their RRSP contribution room, as TFSA maximum contribution limits will now be capped at $5500 for 2016?”

Averaging savings into and out of the right buckets – both before and after retirement – is the objective of astute long term retirement planning. The opportunity is to save with purchasing power – after taxes, inflation and fees. A great relationship with the right questions of tax and financial advisors, beginning with the annual tax filing routine that’s just around the corner. Engaging with a professional who has a designation in Real Wealth Management™ can embellish richly on those conversations.

Best wishes for a peaceful and joyous holiday season.

Evelyn Jacks is author of a new book Family Tax Essentials and President of Knowledge Bureau, an educational institute focused on excellence in financial education and publishing.

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