It’s common for Canadians to look to large, established corporations when job hunting. Whether it’s a big bank or a telecommunication company, these businesses provide established health and dental benefits and pension plans, which attract and retain employees with in-demand skills. These types of perks can make it hard for smaller businesses to compete.
Previously, setting up a pension plan required an army of actuaries, lawyers, and financial planners. However, many companies now offer convenient group pension packages to help small businesses provide their employees with an additional retirement savings vehicle. And even if your small business only consists of yourself, an individual pension plan could be a vehicle to help you save on taxes.
In this article, we discuss the kinds of pension plans a small business can look into and why it’s important to implement one.
Types of pension plans available to small businesses
Not all pension plans make sense to a business, especially smaller businesses. A typical registered employer pension plan may be unaffordable to a small business that’s already concerned about making payroll and rent. That’s why a Group Registered Retirement Savings Plan (Group RRSP) and pooled registered pension plans are more common for small businesses. In both these options, employees contribute to either their RRSP or to a group pension fund through their employer. The employer also has the option to contribute or to not contribute on behalf of their employees. These are great alternatives for small business workplaces that don’t have the same luxurious employer-sponsored pension plans usually found at large corporations.
If you’re living as a solopreneur, an individual pension plan is the better way to go. An individual pension plan is common for high income earners due to the tax benefits. An individual pension plan also has more contribution room than Canada’s Registered Retirement Savings Plan (RRSP) and contributions are tax-deductible.
Why a pension plan is important for your business
When you retire, there are plenty of government retirement plans to provide you with income. This includes Old Age Security (OAS) and the Canadian Pension Plan (CPP). However, this may only be enough for minimum necessities, if even at all. Other items such as an RRSP or a Tax-Free Savings Account (TFSA) also help Canadians save for retirement, but some may find themselves unable to put money away in these accounts. An individual pension plan or registered pension plan can help you and/or your employees save enough for retirement so that no one has to scrape by after they call it quits at 65.
Registered retirement plans, such as a Group RRSP or pooled registered retirement plan, can provide tax benefits to employers and employees. Any contributions that either the employer or employee make are tax-deductible. This is also true if you’re a self-employed worker contributing to an individual pension plan. Individual pension plans are generally a great way to defer taxes when you don’t need to take all the money out of your business for personal day-to-day expenses. By investing in your individual pension plan instead, you can take the money out in retirement when you’re at a lower tax bracket.
As mentioned prior, pension plans are a great way to attract and retain talented employees. Whether you set up a group registered pension plan or a group RRSP, this could help convince a potential employee to choose you over other job offers.
Setting up a pension plan in your business can have many employee retention benefits and tax benefits. Further, many pension plan companies do the administrative heavy lifting, so that you can focus on your business instead of these details. That’s why pension plans are starting to become a common choice for small businesses across Canada.