With the massive impact coronavirus (COVID-19) is taking on employment across Canada, it’s important to know your pension options before you sign anything with your employer if you were recently terminated, or if you’re planning on taking an early retirement.
If you were recently terminated by your employer due to COVID-19 coronavirus and your company has a pension plan, you may want to consider moving your defined-benefit or defined-contribution pension away from your employer and into a secure financial institution that your employer does not have any control over.
When terminated from your job, if you have a vested company pension, you have a choice to make. You can a) take the traditional company pension, b) take a copycat annuity, or c) take the commuted value.
We’ll cover those three options in a moment, but first let’s talk about bond yield and Canada’s recent rate cut due to the coronavirus.
Canada’s rate cut, bond yields, and the impact to your company pension
With the Bank of Canada’s recent rate cut in response to the economic impact of the Coronavirus disease (COVID-19), your commuted value is at its highest value ever. That means that if you were thinking of taking early retirement and choosing to take your pension in a lump sum, now’s the time.
Key to determining your commuted value is what’s called the ten-year bond rate. Thanks to the Bank of Canada rate cut, the ten-year yield now hovers around or below 1%. In other words, the bond yields just fell off a cliff.
Why does this matter? It all has to do with the advantage of commuted value.
But before you make that decision, you need to get a Statement of Pension Benefits from your employer. This is usually sent in the mail a few weeks after your official termination or retirement date.
Your Statement of Pension Benefits
Make sure you keep this document safe! It is proof of what retirement benefits you’re entitled to.
Companies are given a 30-day window from the date that you resign/terminate your employment to provide you with this statement.
It should include:
- All of the information about the benefits you are entitled to in your company’s pension plan
- The commuted value of your plan
- Your options for what to do next and any deadlines you have to make a decision
- Contact information of the pension plan administrator so you can contact him/her with any questions about the pension plan
Do you keep your pension with the company or move it out?
Now that you know exactly what pension benefits you have, you have an important decision to make… Do you leave the money with your current employer’s pension plan and trust them with it? Or, do you move the money out of the company pension plan.
#1) Do nothing
Do nothing. Leave your pension with the company. If you do this, your retirement benefit stays locked in with the company and will continue to accumulate depending on how the company decides to invest it and how the economy and markets perform.
Ask yourself, in 30 years is the company still going to be making vehicles here in Canada and employing people to contribute to my pension? Or will the Canadian auto industry be located in Mexico? Who will be putting money into your pension so you can take it out?
If you decide to go this route, ask the pension plan administrator if there are increased administration fees, because some companies will no longer give you the discounted ‘group’ rate.
#2) Copycat Annuity
The copycat annuity (also known as a “mirror annuity”) is a popular choice for employees coming out of a defined-benefits pension plan.
Think of cutting the cake on your 80th birthday. On that day, will your pension have also turned 80 with you? Will your former employer still exist? What options would your 80-year old self have in the event of another collapse?
This option allows you to receive the same pension that your employer promised you, but it gets paid out by a secure Canadian insurer instead of the company you worked for.
Sun Life, Canada Life and Desjardins will bid on your pension. The Canadian insurance company you choose will pay you the exact same pension, same bridge and the same spousal pension.
Plus, sometimes your company’s pension has a surplus and the Canadian insurance company may pay you your pension plus extra cash. We’ve seen bonus cash payouts up to $30,000. You might qualify.
#3) Take the cash (Commuted Value)
Taking the cash is known as the commuted value. What is “commuted value”, anyway? The short answer is that it’s the lump sum of your company pension. You’re able to move the money out of the company pension plan so it can be self-managed by you.
Your employer cuts 2 cheques to you, one is locked in pension money, the other is cash.
Watch out for the government tax grab, but beyond that, this is your money.
Keep in mind that if you choose this option, you’ll want to make sure to contact a financial planner to help you invest your funds so that you’ll have enough money to last you for the rest of your life. We can help. Call us to speak with a pension expert at 1-888-554-6661.
Advantages of taking the Commuted Value option
Let’s go back to that hypothetical retiree. With the commuted value option, they have the entire $900,000 amount within their control. The money would come in a single payout, with some of it in the form of locked-in pension money, and the rest is taxable cash.
This retiree will now be able to manage the funds directly. They can, for instance, pay down credit cards and mortgages so that they can enter retired life debt-free. They could celebrate the end of working life by taking their family on a luxurious vacation.
They can also choose their own investment options. For example, if they hired Bruce Youngblud to manage the pension, Bruce would be able to grow the money beyond the original commuted value, which provides peace of mind for the rest of their days. Once they reach the end of life, our retiree would also have something to leave their spouse and children.
By taking the entire pension amount out of the hands of the old company, our retiree’s pension is now secured in case the company shuts down. This is of particular concern to auto-workers, as the car manufacturing sector has proven to be vulnerable to collapse since the 2008 economic crisis.
Of course, if you choose the commuted value option, you’ll want to take it at a time that allows you to minimize your tax payouts. (For example, you could work for nine months and then take the commuted value).
If you’re unsure that taking the commuted value option is for you, consider the lifestyle that you want to have, because there are some drawbacks that might not work for you. For example, if you take everything in a lump sum, you’ll have cash to spend, and you might be tempted to let the good times roll. If you spend the money on cars, a cottage, your kids, your grandkids, etc., before you know it, you won’t have a pension anymore. Indeed, the main problem with the commuted value could very well be you.
Everyone who chooses the commuted value inevitably encounters the maximum transfer value (MTV). This will shave off a large amount of your lump sum money in taxes. However, at the current interest rates, your commuted value will be so high that it will pay some of that income tax.
Should you retire early?
With all of the uncertainty due to COVID-19 and future employment, this is a good question to consider.
A risk with early retirement is that you may not have had enough time to build up the funds you’ll need during your retirement. You may need to work longer to save more money.
Typically retirees start their pensions at age 65. But what if you want to access your retirement pension funds earlier?
You may have your pension locked in with your employer as a defined-benefit pension and want to move it out of the company, or you might have your funds locked up in a “Locked-in Retirement Account” (LIRA).
Usually the only way to get your retirement funds out of your locked-in accounts is to retire or reach at least 55 years of age. You can also explore:
- Transferring funds to a Life Annuity, a Life Income Fund (LIF), or a Life Retirement Income Fund (LRIF), depending on which province you live in.
- Utilizing a buyout offer as an opportunity for retiring early.
Consider the following:
- How will your pension be impacted?
- What will your living expenses be during early retirement?
- Will your decreased income be enough to maintain your lifestyle?
- What other retirement income do you have that you can utilize in combination with your pension?
Using a Locked-in Retirement Account (LIRA)
If you take the cash, you have the option to transfer the money into to what is called a “Locked-in Retirement Account” (LIRA) for accumulation purposes. A LIRA is similar to a registered retirement savings plan (RRSP) except that you can’t access the money until you retire (it’s locked in).
Talk to a Certified Financial Planner today over the phone
Before you sign any documents with your employer, give us a call. Let us analyze your multiple income streams in retirement and explore your pension options together.
We’ll make sure to minimize your income tax.
Simply call 1-888-554-6661 to reach Kennedie who will schedule a time to chat with Certified Financial Planner, Bruce Youngblud who will help go over your specific options in more detail, share more with you about our process, and get to know you better.
The services we provide at Pension Solutions Canada are no cost to you. We are an independent firm, not tied to a specific company. We work with all the major providers including Canada Life, Sun Life, and Desjardins.
We’ll assess your commuted cash value, advise you on when to start your CPP, when to start your OAS (Old Age Security), integrate your RRSP contribution room, and provide you with an opinion on your pension options.
To schedule your consultation, simply call 1-888-554-6661 weekdays 9am-5pm.
You can also watch our video presentation and download our pension option notes here.