Policymakers should create a new retirement savings vehicle — tax-free pension plans (TFPPs) — as a way of enabling more middle- and lower-income workers to prepare themselves for retirement, suggests new research from the National Institute on Ageing (NIA) at Ryerson University.

A paper published on Tuesday said TFPPs would function like TFSAs in that they would be funded by after-tax dollars, but they would grow tax free, and investment gains would not be considered taxable income on withdrawal.

“This means pension income from TFPPs would not be considered when determining eligibility for federal or provincial income-tested benefits, credits and subsidies,” it said.

The new vehicle is being proposed to address the fact that the existing pension system can create disincentives for lower-income workers to save for retirement, as pension contributions are tax-deductible but the withdrawals are taxed as income, “which negatively affects lower income earners who collect Guaranteed Income Supplement and other government programs that have an income tested clawback.”

“By replacing the existing tax deferral with ‘pre-paid taxes’ on contributions, TFPPs could do for workplace pensions what TFSAs did for individual savings,” the paper said.

“By improving the attractiveness of workplace plans, and offering better value to both workers and plan sponsors, TFPPs have the potential to raise pension coverage in Canada, and ultimately improve the retirement income adequacy of Canadians and empower employers while protecting the public purse,” it added.

“TFSAs have been very popular for personal savings, and the same option could be provided to workplace pension plans. It would open the pension plan world to many more Canadians, particularly those at risk of becoming Canada’s more financially vulnerable seniors in the future,” said Dr. Bonnie-Jeanne MacDonald, the director of financial security research at the NIA.

“Canada’s modest income earners are the least likely to belong to any plan, despite being the most vulnerable to financial insecurity in older age. TFPPs could be an attractive way to get more Canadians into pension plans,” added Michael Nicin, executive director of the NIA.