The government provides tax assistance for retirement savings by allowing contributions to pension plans to be deducted from income in computing tax. The return on savings in the plans is not taxed each year.
Tax is paid when income is received from the plans.
Defined-benefit RPPs provide a pension that is generally calculated on the basis of earnings and years of service. Money-purchase plans provide whatever pension income the accumulated contributions and return on investment in the RPP will buy at retirement. The reductions in pension and RRSP limits will not compromise the integrity and effectiveness of the private retirement saving system. The measures will adjust the limits to a level where full tax assistance is provided on earnings up to about 2.5 times the average wage, the target set under pension reform. The current maximum pension limit for defined-benefit RPPs will be frozen through 1998.