I received an email from a reader last week who mentioned the Saskatchewan Pension Plan – the pension plan that many of us don’t even know exists.
For those who aren’t familiar with it, the plan is open to all Canadians between the ages of 18-71 and offers a flexible, low-cost alternative to DIY investing.
The best part – you can make contributions using your credit card, giving you the opportunity to earn rewards for making an RRSP contribution.
Basics of the Plan
The Saskatchewan Pension Plan has been around since 1986 and is a professionally-managed fund offering Canadians an alternative to traditional (high-fee) mutual funds. It currently has 32,000 members.
The plan itself is tiny compared to other pension plans – it is valued at about $300 million.
It allows Canadians the flexibility of making contributions whenever they can using their credit card (or through automatic bank withdrawal).
Highlights of the Plan
- Low-cost alternative to mutual funds. The MER (management expense ratio) fluctuates a bit each year but averages around 1%
- Two types of funds – balanced and short-term. The balanced fund focuses on bonds (40%) and equities (60%) and was created in 1986. The short-term fund focuses on mostly T-bills and was created in 2010
- Average return is approximately 8% (balanced fund) and 0.5% (short-term fund)
- Contributions can be made using a credit card, automatic monthly bank withdrawals, cheque or online banking
- Maximum contributions of $2,500 per year. You can transfer up to $10,000 per year from another RRSP or RRIF
- No fees to join or change contributions
One of the best aspects of the plan is the flexibility it offers. The contributions are voluntary and if something comes up where you need extra cash, you can skip a contribution for that month – with no fees to do so.
The plan is also great for small business owners – it takes all the administrative work (and costs) out of the equation for a small business and allows employees to contribute to a pension plan – potentially a way to attract and retain staff.
Another advantage is that it offers the chance to make contributions using your credit card – giving you the chance to earn rewards while making an RRSP contribution.
As you probably know, I’m a fan of cash back rewards and use the Scotiabank Momentum Visa Infinite card. This would give me 1% back for all contributions – effectively eliminating the MER of the plan.
The plan also gives competitive returns. The average return for the past 28 years is 8.35%.
The main disadvantage of the plan is the low annual contribution limit – $2,500. You could transfer over up to $10,000 per year from a separate RRSP or RRIF.
Also, the funds cannot be withdrawn until you turn 55, which is potentially a drawback for someone who is retiring early and looking for access to the funds earlier.
There are only two options to choose from – balanced fund (40% bonds, 60% equities) or short-term (mainly T-bills). This could be a drawback for an investor looking for more selection on where their money is going.
And although the costs are low compared to a traditional mutual fund (1% MER), they are high compared to the ultra-low fees for some ETFs (exchange-traded funds).
Related: 4 Reasons Why I Like ETFs
How the Plan Will Help My Family
I have a relative who is currently self-employed and earns income by working from home. She obviously doesn’t have a company pension plan or company benefits.
While she does know the basics of the markets, she is far from a DIY investor – and has no desire to become one in the future!
The Saskatchewan Pension Plan will allow her to make monthly contributions towards a pension plan without having to constantly monitor the investment performance, investment costs and allocation – something she has no desire to do.
Conclusion: The Saskatchewan Pension Plan is great for anyone looking to invest but not quite comfortable with DIY investing. It’s also useful for the self-employed who have no desire to handle their own investments. The costs of the plan are low and they offer lots of flexibility. You can also get potentially-lucrative cash back rewards for all contributions.
The main drawback is that you can only contribute $2,500 per year and there are only two investment options to choose from.
You can get more information on the Saskatchewan Pension Plan here.