Leaving your job or were recently terminated by your employer and your company has a pension plan?
If you’re like most people, you probably don’t think too much about your pension until you’re getting ready to retire. But if you’re leaving your job, whether it’s by choice or not, you’ll need to decide what to do with your pension.
There are a few different options for moving your pension when leaving your job. Each option has its own set of pros and cons, so it’s important to weigh all of your options before making a decision.
Moving Your Pension Away From Your Past Employer
When you leave your job, 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.
If you have a defined-benefit (DB) pension, you will typically have the option to either leave the pension where it is or transfer it to a new employer’s plan.
If you have a defined-contribution (DC) pension, you will usually be able to take your account balance with you and invest it elsewhere.
You may want to consider moving your pension for a number of reasons:
- To avoid having all your eggs in one basket: By keeping your pension with your employer, you are putting all your retirement savings in one place. If your employer runs into financial trouble, your pension could be at risk.
- To get better investment options: Some employers offer limited investment options for their pensions. By moving your pension to a new provider, you may have access to a wider range of investments.
- To get more personalized service: Some employers outsource the management of their pension plans to large financial institutions. This can make it difficult to get the information and help you need. Moving to a smaller institution may give you more personalized service.
Before you make a decision, it’s important to understand the pros and cons of each option. You should also speak to a financial advisor to get more personalized advice.
The first question to ask is whether or not your defined-benefit or is fully vested and you have full rights over the accumulated contribution amount made by your employer and any investment earnings on those employer-sponsored contributions.
The ‘vesting period’ varies from company to company, but typically is limited to two years or less. Depending on the province you live in, your company may be required to immediately vest your company pension.
Statement of Pension Benefits
Next, you’ll want to get a written statement of benefits from your employer as proof of what retirement benefits you’re entitled to. Make sure you keep this document safe!
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
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.
CHOICE #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.
CHOICE #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. It 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.
CHOICE #3: TAKE THE CASH
Taking the cash is known as the commuted value. 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. Use it for retirement or to pay off your mortgage or buy a boat or RV. Take a trip. The rest is your estate.
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! Schedule a 15-minute call with one of our Certified Financial Planners.
What Happens to My Pension if I Resign?
In Canada, there are federal and provincial rules that protect your pension rights if you resign or retire. However, these rules may not apply to all types of pensions, so it’s important to know the details of your particular pension plan.
If you’re a member of a defined-benefit pension plan, you’re typically entitled to a pension benefit that’s based on your years of service and salary. If you leave your job before you retire, you may be able to take your benefits with you in the form of a lump-sum payment or a Locked-in Retirement Account (LIRA).
If you’re a member of a defined-contribution pension plan, your pension benefit is based on the amounts that you and your employer have contributed, plus any investment earnings. When you leave your job, you can usually take your contributions with you in the form of a locked-in savings plan or a cashable savings account.
Transferring Your Pension to a New Employer
If you’re moving to a new job, you may be able to transfer your pension benefits to your new employer’s pension plan. This can be a good idea if the new plan has better benefits or lower costs than your current plan.
What Happens to My Pension If I’m Fired?
If you’re fired from your job, you may still be able to keep your pension benefits. However, this will depend on the rules of your particular pension plan.
For example, some defined-benefit pension plans will allow you to keep your benefits if you’re fired before you reach retirement age. However, other types of pension plans may require you to forfeit your benefits if you’re fired.
If you’re not sure what will happen to your pension benefits if you’re fired, it’s a good idea to speak to a financial advisor or the administrator of your pension plan.
Leaving Your Job Without a New Job Lined Up
If you’re leaving your job without another job lined up, you may want to consider taking your pension benefits with you in the form of a lump-sum payment or a locked-in savings plan.
Taking Your Pension as a Lump-Sum Payment (Cashing out Pension After Leaving Your Job)
If you decide to take your pension as a lump-sum payment, you’ll receive all of your benefits in one lump sum. You can then use this money to invest in another retirement savings plan, such as an RRSP or a TFSA.
One downside of taking your pension as a lump-sum payment is that you’ll have to pay income tax on the entire amount all at once. This could push you into a higher tax bracket and result in a bigger tax bill.
Another downside is that you’ll no longer have any guarantee of income in retirement. If you need to rely on this money to cover your living expenses, there’s a risk that you could outlive your savings.
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).
The Bottom Line
Moving your pension when leaving your job doesn’t have to be difficult. There are a few different options available, so it’s important to understand all of your choices before making a decision.
Let us analyze your multiple income streams in retirement. We’ll make sure to minimize your income tax. Retirement planning is about budget and taxes. You address your spending. We address tax minimization. Schedule a 15-minute call here with one of our Certified Financial Planners!