Retiring from Toyota involves more than choosing a retirement date. You will also need to decide what to do with your workplace pension, when to begin government benefits such as the Canada Pension Plan and Old Age Security, and how your pension choice may affect your taxes, flexibility and estate.
Toyota employees may have several pension options to consider, including remaining with the company’s defined benefit pension plan, establishing a copycat pension or taking the commuted value of the pension.
Each option handles your retirement income differently. Before making a decision, it is important to understand how the choices work, how the income is taxed and what may happen to the remaining value after your death.
Understanding Your Toyota Pension Options
A Toyota employee approaching retirement may need to compare three primary pension choices:
- Remaining with the Toyota defined benefit pension plan
- Establishing a copycat pension
- Taking the commuted value of the pension
These options can create very different retirement outcomes.
The company pension and copycat pension are designed to provide taxable pension income. The commuted value option transfers the value of the pension out of the plan, with a portion generally going into a locked-in retirement account and the balance potentially being paid to you as taxable cash.
Your decision may affect how much control you have over the pension assets, how the money can be passed on and how much tax planning may be required.
What Is a Defined Benefit Pension Plan?
Toyota’s company pension is a defined benefit pension plan.
A defined benefit pension provides retirement income according to the terms of the pension plan. Rather than receiving a pool of money that you must manage yourself, you receive pension payments from the company plan.
This option may appeal to someone who values a structured retirement income and does not want to personally manage the pension’s transferred value.
The pension payments you receive are taxable income. Every dollar paid to you through the company pension must be included as income for tax purposes.
Before choosing to remain with the Toyota pension, review the information provided in your pension statement. The statement explains the benefits available under the plan, including any inflation protection and the treatment of the pension after your death.
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What Is a Copycat Pension?
A copycat pension is designed to mirror the company pension.
Instead of receiving your pension from Toyota’s pension plan, the pension is reproduced through an insurance arrangement. The objective is to provide the same pension benefits available under the company plan.
Because the copycat is intended to copy the Toyota pension, the same general pension features apply. This includes the treatment of the pension income for tax purposes, any applicable inflation provisions and the available survivor options.
The Potential Copycat Cash Surplus
A copycat pension may also create a cash surplus.
The amount needed to establish the copycat pension is calculated, and any remaining money may be paid to you. The exact surplus will depend on the pension numbers and the cost of reproducing the benefit.
This additional cash can be an important part of the comparison between remaining with the Toyota pension and moving to a copycat pension.
However, the surplus should also be considered from a tax-planning perspective. Receiving additional cash may create taxable income, depending on how the pension transaction is structured.
Is a Copycat Pension Taxed Differently?
A copycat pension is not taxed differently from the Toyota company pension.
Every pension payment you receive is taxable income.
Whether the payment comes from the company pension or the copycat pension, the income must be reported for tax purposes. Choosing a copycat does not turn the monthly pension payments into tax-free income.
The tax treatment is therefore one of the similarities between the company pension and the copycat pension.
The potential cash surplus associated with the copycat should be reviewed separately as part of the overall transaction.
What Is the Commuted Value?
The commuted value is the calculated lump-sum value of your future pension.
Instead of receiving pension payments from Toyota or recreating those payments through a copycat pension, you transfer the value out of the pension plan.
The money is then divided according to pension and tax rules.
Typically, approximately two-thirds to three-quarters of the pension value may be transferred into a locked-in retirement account, commonly called a LIRA. The remaining amount may be paid to you as cash.
The exact proportions will depend on your individual pension calculation.
How a LIRA Shelters Part of the Pension Transfer
A LIRA is an account used to hold locked-in pension money.
The portion of the commuted value that is eligible for the LIRA can be transferred on a tax-sheltered basis. You do not pay immediate income tax simply because the eligible pension money moves from the Toyota pension plan into the LIRA.
The funds remain designated for retirement and are subject to locking-in requirements.
The LIRA portion is only one part of the commuted value decision. The taxable cash amount beyond the eligible transfer can create a more immediate tax issue.
How Much Tax Will You Pay on the Commuted Value?
The amount of tax you may pay depends partly on how much RRSP contribution room you have available.
After the locked-in portion has been transferred to the LIRA, the remaining amount may come to you as cash. Receiving that money directly can create taxable income.
Your personal RRSP may provide an opportunity to shelter some or all of the taxable amount.
The amount you can contribute will depend on your available RRSP room. Someone with substantial unused contribution room may be able to shelter more of the cash portion than someone with little or no available room.
This is why the tax question cannot be answered by looking only at the total commuted value. You also need to review:
- The amount eligible for the LIRA
- The amount expected to be paid as cash
- Your available RRSP contribution room
- The portion that may remain taxable after any RRSP contribution
Tax planning should be considered before the transfer is completed so that you understand what will happen to each part of the pension value.
Will the Toyota Pension Keep Up With Inflation?
Toyota’s pension offers some inflation protection on the base pension.
The inflation protection does not apply to the bridge benefit.
The bridge is a separate portion of the pension, so employees should distinguish between the base pension and the bridge when reviewing how the retirement income may respond to inflation.
Your Toyota pension statement should provide the details that apply to your specific benefit.
A copycat pension is intended to reproduce the Toyota pension. The same inflation provisions would therefore apply to the copycat, including inflation protection on the base pension and the lack of inflation protection on the bridge.
This is another reason to review the complete pension statement rather than looking only at the starting monthly payment.
What Happens to the Pension When You Die?
The answer depends on which pension option you select.
The company pension and copycat pension generally follow one type of structure, while the commuted value provides a different estate-planning outcome.
Toyota Pension and Copycat Survivor Benefits
If you have a spouse or partner, the Toyota pension may provide a spousal continuation at a reduced amount.
The copycat pension can offer the same type of continuation because it mirrors the company pension.
This means that after the first spouse dies, the surviving spouse may continue receiving a reduced pension payment according to the option selected.
Once both partners have died, the pension payments end. There is generally no remaining pension balance to pass to other beneficiaries or the estate.
This is similar to government pension benefits. Once the person entitled to the benefit dies, the payments stop.
Commuted Value and Your Estate
The commuted value works differently because the pension value is transferred into accounts rather than converted into a continuing pension payment.
If money remains in the accounts when you die, the residual value can be passed on.
The remaining amount may generally pass to your spouse on a tax-deferred basis. Amounts passing beyond the spouse may be taxable.
The potential to leave remaining pension assets to an estate is one of the major differences between the commuted value and the pension income options.
The value of this feature will depend on how much remains in the accounts at the time of death.
Which Option Provides the Most Flexibility?
The commuted value generally offers more flexibility than the copycat pension.
A pension provides a predetermined stream of income. Once the pension arrangement is established, your ability to change how the underlying value is used is limited.
With the commuted value, the pension assets are moved into accounts. This can provide more control over how the funds are invested and how the money is used within the applicable retirement-account rules.
That additional flexibility also comes with greater responsibility.
You need to consider how the pension money will be invested, how withdrawals will be managed and how long the assets may need to support your retirement.
Flexibility can be valuable, but it should be evaluated alongside the security and predictability offered by a pension.
Should You Stay With the Toyota Pension or Choose a Copycat?
The strength and future of the Toyota pension plan may be part of your decision.
When evaluating whether to remain with a manufacturer’s pension, consider whether you believe the company will continue operating and producing in Canada.
The hiring of future employees may also matter because new workers and ongoing contributions can continue supporting the pension plan.
If you believe Toyota will maintain a strong Canadian presence, continue production and hire new employees, you may view the company pension as solid.
If you have concerns about the company’s long-term Canadian operations or the future of the pension plan, the copycat pension may deserve closer consideration.
The copycat allows you to maintain the pension structure while moving the payment responsibility away from the manufacturer.
This does not automatically make one option better than the other. It identifies another factor that Toyota employees may want to examine before making a permanent choice.
Do Not Forget CPP and OAS
Your Toyota pension decision is only one part of your retirement income plan.
You will also need to decide when to begin receiving the Canada Pension Plan and Old Age Security.
The timing of these government benefits should be considered alongside your Toyota pension, copycat pension or commuted value strategy.
Rather than making each decision separately, consider how the income sources will work together.
Your retirement income may eventually include:
- The Toyota company pension or copycat pension
- Withdrawals from a LIRA
- Withdrawals from an RRSP
- Canada Pension Plan benefits
- Old Age Security benefits
- Other retirement savings or income
The timing of each source can affect your taxable income and the amount of retirement cash flow available to you.
Questions to Review Before Making Your Decision
Before choosing a pension option, take time to answer several important questions:
- Do you prefer predictable pension income or greater control over the assets?
- How much of the commuted value can be transferred into a LIRA?
- How large will the taxable cash portion be?
- How much unused RRSP contribution room do you have?
- How important is inflation protection on the base pension?
- Do you need a spousal continuation option?
- Do you want the possibility of leaving residual assets to your estate?
- How much flexibility do you want over future withdrawals?
- How confident are you in Toyota’s long-term operations in Canada?
- When should you begin CPP and OAS?
These questions are closely connected. The best pension choice cannot be determined by reviewing only one feature.
Get Help Reviewing Your Toyota Pension Options
Toyota employees approaching retirement may have several important decisions to make within a relatively short period.
Remaining with the company pension can provide predictable retirement income. A copycat pension can reproduce that income outside the Toyota pension plan and may provide a cash surplus. Taking the commuted value can create greater flexibility and estate value, while also introducing investment and tax-planning responsibilities.
Pension Solutions Canada can help you compare the available choices and understand how each option may fit within your broader retirement plan.
Bruce Youngblood works with retiring employees to review company pensions, copycat pensions, commuted values, LIRA transfers, RRSP considerations and the timing of government benefits.
Click here to book a complimentary 15-minute Zoom call and discuss your individual pension situation.
