Ford Oakville workers returning to work or preparing to retire may be facing an important decision about what to do with their company pension. For decades, the traditional choice was straightforward: retire and begin receiving the monthly pension provided by the company.
That option remains available, but it is no longer the only path to consider.
Depending on your circumstances, you may also have the opportunity to establish a copycat pension through a Canadian insurance company or transfer the commuted value of your pension into a locked-in retirement account.
Each option works differently. The right decision may depend on your health, employment plans, retirement income needs, debt, existing retirement savings and how much control you want over your pension assets.
The Three Main Ford Pension Options
Ford Oakville workers considering retirement may have three primary pension options:
- Continue with the traditional company pension.
- Establish a copycat pension through a Canadian insurance company.
- Transfer the commuted value into a locked-in retirement account.
The company pension offers a familiar monthly retirement income. A copycat pension is designed to provide an identical pension through an insurance company rather than the employer. The commuted value option allows you to transfer the pension’s value into an investment account.
Understanding how these choices differ is an important first step before deciding what to do.
Option One: Take the Traditional Company Pension
The traditional pension option allows you to begin receiving the company pension as Ford employees have done for decades.
With this option, the pension remains connected to the company plan, and you receive the retirement income available under the terms of that plan. This can be an appealing choice for someone who wants a predictable pension payment without taking responsibility for managing the transferred pension assets.
However, the monthly payment should not be the only factor considered.
Your health can play an important role in determining whether remaining in the pension plan is appropriate. If you have significant health concerns or do not expect to receive pension payments for a long period, you may not ultimately receive the full value that could otherwise have been transferred.
This is one reason pension decisions should be based on your complete personal situation rather than automatically choosing the option that feels most familiar.
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Option Two: Establish a Copycat Pension
The copycat pension, also known as a copycat annuity, is a newer option for many Ford employees.
With a copycat pension, the retirement income is moved away from the employer and placed with a Canadian insurance company. This could include an insurer such as Manulife, Desjardins, Sun Life or another Canadian provider.
The objective is to reproduce the company pension through the insurer. You receive the same pension income, but the payments come from the insurance company rather than directly from your former employer.
Receiving the Same Pension From a Different Provider
The main feature of the copycat pension is that it is intended to provide an identical pension.
From an income perspective, the pension continues in the same form. The major change is the organization responsible for making the payments.
Instead of drawing the pension from the Ford plan, you draw it from the Canadian insurance company selected to provide the annuity.
This gives Ford workers another way to preserve the structure of their pension while moving the responsibility for the payments to an insurer.
The Potential Cash Surplus
A copycat pension may also produce a cash surplus.
After the insurance company receives the amount required to reproduce the pension, a portion of the commuted value may remain. Recent surpluses have often been relatively modest, although amounts in the range of approximately two to five per cent of the commuted value have been seen.
Depending on the size of the pension, the remaining amount could result in a payment of $5,000, $10,000, $15,000 or another amount.
This surplus is taxable money. It should therefore be considered as part of the overall pension and tax planning process rather than treated as entirely spendable cash.
The existence and size of a surplus will depend on the numbers involved at the time the copycat pension is established.
Managing the Copycat Pension Process
Establishing a copycat pension involves coordinating the transfer and working through the required process with the pension plan and the selected insurer.
Pension Solutions Canada has direct experience managing this type of transaction for Ford employees, including completing the first copycat pension at Ford Motors.
Because the copycat pension may be unfamiliar to employees and company representatives, knowledgeable guidance can help manage the paperwork, communication and movement of the pension assets.
Option Three: Transfer the Commuted Value
The third option is to take the commuted value of the pension.
The commuted value represents the cash value assigned to the future pension. Rather than receiving the monthly company pension or recreating it through an insurer, you transfer that value out of the pension plan and into an investment account.
The locked-in portion of the pension is generally transferred to a locked-in retirement account.
What Is a LIRA?
A locked-in retirement account is commonly known as a LIRA.
A LIRA is an investment account designed to hold pension money after it has been transferred out of an employer pension plan. The funds remain dedicated to retirement and are subject to locking-in rules.
The transfer of the eligible pension money into the LIRA does not create immediate tax on that amount.
Once the transfer has been completed, the pension assets can be invested within the account. This gives you greater involvement in how the money is managed compared with simply receiving the company pension.
What Happens to the Amount That Cannot Go Into the LIRA?
A commuted value transfer will frequently include an amount beyond what can be transferred directly into the LIRA.
This is where careful tax planning becomes especially important.
Depending on your available contribution room and personal circumstances, it may be possible to place some or all of the additional amount into your RRSP. There may also be an opportunity to use a spouse’s or partner’s RRSP contribution room.
The objective is to determine whether the taxable amount can be sheltered rather than immediately received as taxable income.
This cannot be answered the same way for every Ford employee. Your available RRSP room, your spouse’s or partner’s situation and the size of the excess amount all need to be considered.
When the Commuted Value May Be Attractive
The commuted value option may work particularly well for someone who intends to continue working.
For example, a skilled tradesperson or professional may retire from Ford but continue earning employment or business income. Because current earnings can continue paying for everyday living expenses, the transferred pension money may not need to be accessed immediately.
The commuted value can instead be placed into the LIRA and invested for the future.
This can allow the pension assets to remain set aside while employment income supports the individual’s current lifestyle.
A complete strategy may include several different pools of retirement money, such as:
- Existing RRSPs
- The new LIRA
- A taxable cash surplus
- Ongoing employment income
These pieces should be reviewed together. The goal is to understand how the pension transfer fits with the rest of your financial situation rather than viewing the Ford pension in isolation.
Health Should Be Part of the Pension Decision
Health is one of the most important personal factors to consider when choosing between the available pension options.
The company pension and the copycat pension are designed to provide income over time. Their value to you is therefore connected to how long you receive the payments.
Someone in poor health may want to think carefully before committing to a pension or copycat pension. If pension payments are received for only a limited period, that person may not receive as much value as someone who collects the pension over many years.
Taking the commuted value can place the pension assets into an account rather than relying entirely on future pension payments.
This does not mean the commuted value is automatically right for every person with health concerns. It means health should be included in the analysis before making a permanent pension decision.
Using Pension Money to Address Debt
Debt may also influence the decision.
Some Ford employees may enter retirement with debts they would like to eliminate. Depending on how the pension transfer is structured and how much money is available outside the locked-in portion, pension-related funds may potentially be used as part of a debt-reduction strategy.
Paying down debt can improve monthly cash flow and reduce financial pressure during retirement. However, this needs to be weighed against the amount of retirement savings that will remain afterward.
Using available money to eliminate an important debt is very different from spending the pension surplus on a major discretionary purchase.
The purpose of the pension is to help fund your future. Any use of the money should be considered within that long-term retirement plan.
Why the Decision Requires More Than a Simple Comparison
It can be tempting to compare the three pension options only by looking at the monthly pension or the total commuted value.
The better decision requires a wider review.
A Ford Oakville worker who plans to stop working immediately may have different income needs from someone who expects to continue in the trades or another profession. Someone with substantial RRSP savings may approach the decision differently from someone whose Ford pension represents most of their retirement assets.
Tax considerations may also change the outcome. The amount that can be transferred to the LIRA, the size of the taxable surplus and the RRSP contribution room available to you or your partner all matter.
Your decision should take into account:
- Your age and expected retirement timeline
- Your current health
- Whether you plan to continue working
- Your need for immediate monthly income
- Your existing RRSPs and other investments
- Your available RRSP contribution room
- Your spouse’s or partner’s contribution room
- Any debts you want to address
- The potential taxable surplus
- Your comfort with managing invested retirement assets
Once the pension option has been selected and processed, changing direction may be difficult or impossible. That makes it important to review the complete picture before signing the final documents.
Getting Help With Your Ford Pension Options
The traditional company pension, copycat pension and commuted value transfer each offer a different way to handle your retirement benefits.
The company pension provides the familiar monthly retirement income directly from the plan. The copycat pension recreates that income through a Canadian insurance company and may leave you with a taxable cash surplus. The commuted value transfers the pension assets into a LIRA, potentially providing more control and flexibility while creating additional tax and investment decisions.
Pension Solutions Canada can help Ford Oakville employees evaluate these choices and manage the process.
Bruce Sunga Blood is a Certified Financial Planner and Canadian Investment Manager located in Dundas, Ontario. Ford employees can book a complimentary 15-minute Zoom call to discuss their circumstances, pension choices and potential next steps.
Click here to schedule a free 15-minute call with us.
