A Pooled Registered Pension Plan (PRPP) is a retirement savings plan option for Canadians including those who are self-employed.
Over 10 million Canadians work for small and medium-sized companies, which is almost two-thirds of the total workforce. Many of those companies don’t provide a workplace pension. Similarly, there are almost 3 million self-employed Canadians who don’t have a work-sponsored pension plan.
To provide these workers with some form of work pension, the government introduced the PRPP in Canada. We take a deep dive into PRPP meaning, look at how employee PRPP contributions work (as well as employer PRPP contributions), how PRPP compares with RRSPs and RPPs, and answer the question, what does PRPP stand for?
How does a PRPP work in Canada?
A Pooled Registered Pension Plan allows Canadian employees (and self-employed Canadians) to pool their investments in one plan, which provides economies of scale.
Thousands of Canadians’ PRPP funds are pooled together, allowing those accumulated investments to enjoy a wider range of investment opportunities at a lower cost than if each person invested individually.
Pooled Registered Pension Plans are overseen by the Office of the Superintendent of Financial Institutions (OSFI) and subject to rules laid out in the Pooled Registered Pension Plan Act. PRPPs are therefore only available in provinces that have an agreement with the OSFI.
A PRPP is like a type of defined contribution plan, but rather than being managed by employers, it’s managed by one of five Canadian companies licensed to administer the plans. The employee’s PRPP contributions and those of the employer (if the company chooses to contribute) are combined in the employee’s account.
PRPP Tax Benefits
Those contributions reduce the employee’s income (for tax purposes) and usually bring an immediate tax benefit. Another advantage of the PRPP in Canada is that all investment growth in the plan (including interest earned, dividend payments and capital gains) is tax-deferred.
PRPP holders are therefore only taxed on their savings when they withdraw money from the PRPP. This tax-deferred status allows their savings to grow significantly faster than they would if earnings were taxed within the plan.
PRPP contributions
What is PRPP’s contribution limit? The most that anyone can contribute to their PRPP in any year is the same amount as their RRSP limit. This is either 18% of earned income from the previous year or the annual RRSP limit, whichever is the smaller amount. However, if an employee hasn’t used up contribution limits from previous years, those amounts are added to it. Your most recent notice of assessment from the CRA outlines your current contribution limit. Any contributions made towards a PRPP will be deducted from allowable contributions to an RRSP or spousal RRSP. This includes employer PRPP contributions. Some companies contribute to their employees’ PRPP, while others don’t (and they’re not obliged to).
If you overcontribute to your PRPP, the amounts above your contribution limit won’t bring any tax advantages. If you overcontribute by more than $2,000, you’ll be forced to pay a penalty, so it’s really important to keep track of your contribution limit and the amount you contribute.
PRPP withdrawals
Pooled Registered Pension Plans are designed to provide income in retirement. While you’re working, you contribute to your PRPP, meaning that you’re not supposed to withdraw from it until you reach normal retirement age. If you do withdraw from it early, you’ll have to pay taxes and penalties.
There are some exceptions, such as if you have a very small balance or if you have a shortened life expectancy. If you stop working for your employer or your employer withdraws from the plan, you can transfer your investments into another pension plan, which has to remain locked in until you retire.
Once you retire, you will start receiving income from your PRPP (and that income will be considered taxable). You may also be able to transfer your PRPP funds into a Registered Retirement Income Fund (RRIF), from which you can withdraw income regularly.
PRPP vs RRSP
There are a few differences between a PRPP vs RRSP (Registered Retirement Savings Plan). One of the key differences is that PRPPs can only be administered by one of the five companies listed later.
If a company contributes to an employee’s PRPP in Canada, those contributions are not classed as taxable income for the employee. However, contributions made by an employer to an employee’s group RRSP account are classed as taxable income.
The investments you can hold in a PRPP (such as company shares, mutual funds, bonds and exchange-traded funds) are the same as those that can be held in RRSPs.
PRPP vs RPP
The key difference between a PRPP vs RPP (Registered Pension Plan) is that employer contributions to RPPs are mandatory (whereas with PRPPs they are optional). The employer also decides if the employee can make contributions to the plan.
Once you’ve contributed to a PRPP for a year, you can take a break from making contributions for between three months and five years, after which you can continue to make contributions. You have to make continuous contributions for at least a year in between breaks.
What is a PRPP’s eligibility rules?
The Pooled Registered Pension Plan is available to employees in Yukon, Nunavut, Northwest Territories, Ontario, Nova Scotia, Saskatchewan and BC. The PRPP in Canada is also available to federal employees who work in sectors like banking, navigation and shipping. Self-employed Canadians who live in Nunavut or the territories, or one of the provinces that has an agreement with the OSFI, are also eligible.
If employers offer a Pooled Registered Pension Plan, they can choose which types of employees qualify for it, such as salaried, full-time, management, etc. The employer would then have to choose one of the five companies allowed to administer its PRPP:
- Sun Life Financial
- Manulife Financial
- The Royal Trust Company (RBC)
- Industrielle Alliance, Assurance et services financiers inc.
- Canada Life
How to boost your PRPP income
Depending on how long you’ve contributed to a PRPP, you may find that the income you receive from it (along with CPP and OAS payments) is not enough to have the kind of retirement you’ve always dreamed of.
An efficient way of boosting your retirement income is to take out a CHIP reverse mortgage from HomeEquity Bank. If you’re a homeowner aged 55-plus, you can cash in up to 55% of your home’s value with either a reverse mortgage lump sum or regular monthly payments. The money can be used for any purpose: to fund a trip, make renovations or simply improve your retirement standard of living.
One of the most attractive features of a reverse mortgage is that you don’t need to pay off what you owe until you sell your home or move out. There are no regular mortgage payments to worry about.
Call us today at 1-866-758-2447 to find out how much you could borrow to boost your PRPP retirement income.
