By Jacqueline Ozdemir, MBA, CFA, Financial Advisor
Assante Capital Management Ltd.
When starting a new job, it is important to consider the salary that the job pays and the other benefits you may receive, as these have the potential to add up over time and contribute positively to your overall financial well-being.
In this article, I break down some of the most common employer benefit savings programs that go beyond just your salary.
Group Registered Retirement Savings Plan (RRSP)
This is a type of savings program that allows you to save for retirement. It is just like an RRSP that you may have at your own bank or brokerage, but the difference here is that your employer will also contribute to it (in most cases). You may have the option to contribute a certain amount of your pay stub to the Group RRSP, which for a lot of the programs that companies offer, may average around 4%.
This amount will be automatically deducted from your pay stub and invested in the employer sponsored investment plan. The money can be invested in a wide range of investment products that are RRSP eligible. Often times, the employer will match your contributions up to a certain amount. Therefore, if you contribute 4% of your salary, your employer may match this at 100%.
Assuming you have an income of $50,000, this could mean savings of $2,000 into your Group RRSP. In addition, your employer would also contribute $2,000.
Contribution Limits
There is a cap to how much an employer will match and this information can be found in your employment benefits package. It’s important to remember that the contributions you and your employer make to your Group RRSP, will use up your RRSP contribution room.
When you’re signing up for your Group RRSP, remember to double check your contribution limit (found on the CRA website or prior year’s Notice of Assessment) to ensure that you and your employer’s contributions do not exceed your limit. If you have an RRSP outside of your employer as well, such as at your bank or brokerage, make sure that the total of all your contributions plus those done with your employer do not exceed your contribution limit.
How to Invest
With your Group RRSP, you will often have the choice to choose how you want your funds to be invested. A lot of Group RRSP providers will provide recommendations or give you the option to select your own investment mix from a list of options.
Recommendation: Consider investing your Group RRSP in the same way you would invest any other sort of investment that is geared towards a specific goal.
Group RRSPs are a great way to save for retirement. When you get set up with a Group RRSP, you are authorizing your employer to direct part of your pay stub to the Group RRSP provider. These funds are taken before they even hit your bank account, so you are not at risk of spending the money before it can be saved. The portion your employer contributes is definitely an added bonus as it has the potential to double what you are already saving.
If you are to ever leave your employer, you will have the option to leave the funds with the firm managing the Group RRSP or to transfer your Group RRSP to your bank or brokerage and even combine it with other RRSP savings. You may also have the option to withdraw the funds however, this can be quite punitive from a tax perspective.
Recommendation: Speak with your financial advisor or tax specialist before considering this.
Pensions
Pensions are another great way to ensure you are saving for retirement. There are two primary types of pensions in Canada which include: Defined Contribution Pension Plan (DCPP) and Defined Benefit Pension Plan (DBPP).
Defined Contribution Pension Plan (DCPP)
With a DCPP, you contribute to the plan (similar to a RRSP) and your employer will also match your contributions, up to a maximum. You will have the option of choosing how these funds are invested and will have recommendations made based on your risk tolerance and goals for the money.
This type of savings is called a defined contribution plan because the amount you put in is defined (ie. 3% or more or less of your income). However, the amount that you can pull out of it in the future is dependent on how well the investments performed. Similar to a RRSP or Group RRSP, the funds you contribute to it are tax deductible. Additionally, the funds you and your employer contribute, reduce your available RRSP contribution room.
If you leave your employer, you will be given the option to commute your pension. Commuting your pension means to take it with you and take it away from your employer. Depending on the dollar amount, you may have the option to move it to your RRSP and put it into a LIRA (Locked in Retirement Account – similar to an RRSP, but funded by pension money). Or if you have started with a new employer that also offers a pension, you may be able to combine the two.
If you move your DCPP to an RRSP or LIRA, you may have more control of how the assets are invested or add it to your existing investment portfolio so that you may hold it at an online broker, or with your financial advisory team.
With a RRSP, you can withdraw funds anytime (although punitive if done during your working years).
With a LIRA, you have to wait until age 55 at least.
When leaving your employer, you will be provided a statement which provides you with your DCPP commuting options.
Defined Benefit Pension Plan (DBPP)
With this type of plan, the benefit you receive in retirement is defined. You and your employer contribute to this type of plan.
The money that you and other employees contribute is pooled together, invested and then provide you with income in your retirement years. Similar to a DCPP and RRSP, these contributions will reduce your RRSP contribution room. The amount of guaranteed income you receive from this type of savings plan is based on a formula the pension plan uses, which is usually based on the number of years you have worked at the company and what your average salary (or highest 5 years’ salary) was while employed there. In other words, this type of savings plan will provide you with a guaranteed income in retirement.
If you leave your employer, you often have the option to commute your pension similar to a DCPP as mentioned above. However, in doing so, you may be giving up your guaranteed income steam in retirement.
DBPPs have become increasingly less popular in Ontario, and DCPPs are becoming the norm.
Recommendation: If you have a Defined Benefit Pension Plan, it may be best for you to not commute it if you are to leave your employer.
Whether you retire or leave your employer in your working years, you can leave your pension with your employer and begin redeeming your guaranteed annual income once retired. Unlike an RRSP or Group RRSP where you can often redeem funds from them at any time (albeit punitive from a tax perspective), you generally cannot begin redeeming funds from a DCPP or DBPP until at least age 55.
Stock Compensation
Employee stock options
Employer stock options may be available for publicly traded companies (ie. companies that trade on the TSX for example) and sometimes even for non-publicly traded companies, normally smaller companies. Employer stock options give you the option to purchase shares of the company; often at a lower price than what others outside of the company would be able to purchase them for.
For example, assume you work for a publicly traded company, ABC. You are offered 100 stock options that allow you to purchase shares of ABC, at $20 a share. At the time you get these stock options, the shares are only worth $15 on the TSX.
After a few years if the value of the stock has risen to $25 a share on the TSX, you may wish to "exercise your options", meaning you buy the 100 shares at $20 a share ($2,000 cost). Then you immediately turn around and sell them on the TSX, at $25 a share (receive $2,500), therefore a $500 profit.
There are tax implications in doing this, and often your employer will calculate the tax on your behalf and hold back some of your profit to remit to the CRA; so, your profit may drop from $500 to $250 for example.
Despite the taxes, employee stock options can still be quite lucrative.
Restricted Stock Units (RSUs)
RSUs are another form of compensation in which an employee may be awarded shares of the company they work for, but this award usually comes with conditions. This condition is normally a vesting period (typically 3 years) which means you won’t be able to access or sell all the shares until a period of 3 years has gone by.
Vesting Period
For example, you work for Company XYZ and you are awarded RSUs for good performance. If you are awarded 300 RSUs, you can convert these to stock of XYZ and then sell the stock on the TSX to get cash. However, to help ensure you don’t cash out your stock right away and leave the company, employers will often add conditions to this award, such that only 100 of these RSUs actually become available to you each year for 3 years. RSUs are effectively an award that you have to wait to cash in. The period that you have to wait to cash them in is known as the vesting period.
This means that you cannot reap the rewards until a certain time period has elapsed. This is another way employers can help reduce employee turnover, by giving employees another reason to stay with them for longer.
Condition of Taxes
When the RSUs are awarded, or promised to you, there is no taxable event. When they vest, you can sell them if you wish, and the value at the time is considered a taxable benefit. This means it will be taxed at the same tax rate as your salary.
Using our above example, let’s assume you work for company XYZ, and you were awarded 300 RSUs on January 1, 2024. On January 1, 2025 these shares are worth $5 each and you are allowed to cash out 100 of them. You can sell them on the TSX for $5 each and collect $500. This $500 will be added to your income for the year. It will be taxed accordingly such that your take home profit may be something around $300. Despite the taxes, RSUs can really boost your take home pay and should be taken advantage of, if available.
Stock options and RSUs can be a big benefit. They align their work force’s efforts to the magnitude of these benefits. The idea being that if everyone works hard, the RSUs and stock options will be more valuable in the future.
Health and Insurance Benefits
When accepting a new position, it is especially important to ask about their health and insurance benefits.
This pertains to additional health care coverage and living benefits, such as critical illness, disability benefits and life insurance.
Many employers will offer some sort of basic healthcare package, which helps you pay for things like prescription drugs, trips to the eye doctor and dentists, as well as activities like physiotherapy and massage treatment.
Some employers may additionally offer critical illness or disability coverage.
From my experience in working with clients, I have found employers tend to offer one or the other, but rarely both critical illness and disability coverage.
In summary, Critical Illness Insurance provides a lump sum payout in the event you were to become critically ill while working with your employer. Disability, on the other hand, would provide you with monthly ongoing payments for a period of time in the event you were to become disabled. The amount received is a percentage of your salary.
Many employers will also offer a basic form of life insurance coverage. Instead of a flat amount offered to everyone, the benefit here is often listed as “1x salary” or “2x salary”. This means in the event you were to pass away; your loved ones would receive a payout equal to your salary or double your salary.
Remember that these benefits are rarely portable, meaning that they may not be available if you are to leave your employer.
Recommendation: If you are leaving your employer, I recommend speaking with an Insurance Advisor to see what types of coverage you should prioritize and purchase on your own if possible.
Conclusion
When applying for jobs or comparing different offers, remember to consider all the possible benefits that the new job offers. While a higher salary is always nice, it is worth considering what other employer benefits savings options are available as this forms part of your total financial compensation.
If currently in a role, I encourage you to review your benefits options to ensure that you are taking advantage of them and maxing out their potential.
Jacqueline Ozdemir is a Financial Advisor with Assante Capital Management Ltd. The opinions expressed are those of the author and not necessarily those of Assante Capital Management Ltd. Please contact her at (905) 272-2750 or visit www.fergusonfinancialplanning.com to discuss your particular circumstances prior to acting on the information above. Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. Insurance products and services are provided through Assante Estate and Insurance Services Inc.
What’s Next?
You can follow us on Instagram, Pinterest and LinkedIn to see more content about women and money, personal finances and planning for your financial future. You can also check out our other blog posts here!
Ready to kickstart your financial independence journey? At Untangle Money, our mission is to provide inclusive support to women and individuals who may feel underrepresented in traditional financial spheres, often dominated by cisgender men. At Untangle Money, we're here to help you achieve financial success with clear advice and practical solutions. Our affordable Untangle MINI AUTO makes it easy for anyone to get started. Join thousands of women improving their financial well-being. Check out our products and plans here, or get in touch for a free consultation!
Commentaires