Deciding what to do with your pension when you leave a job can be daunting, especially if you’re trying to figure out how to best secure your retirement income. One option you may have heard about is transferring your company pension to a copycat annuity. This option allows you to mimic the payments you would have received from your pension while gaining control over the funds and the ability to choose an insurance provider. But is it the right choice for you? Let’s break down how a copycat annuity works and whether transferring your company pension to one is the best move.
What is a Copycat Annuity?
A copycat annuity is a type of life annuity designed to replicate the monthly payments you would have received from a defined-benefit pension plan. This option is often available when you leave a job and have the choice to either keep the pension in place or take the commuted value and transfer it to a copycat annuity.
By transferring the commuted value of your pension to an insurance company, the annuity contract you purchase ensures that you receive the same type of guaranteed monthly income for life that you would have received from the pension. The difference is that the money is managed by the insurance company instead of your employer’s pension plan.
The main advantage of a copycat annuity is that it provides the same security and predictability as a defined-benefit pension while giving you more control over where the funds are held and by whom.
Copycat works like this: Take your final pension statement to the photocopier. Run a copy. Cross out your company name at the top. Write in the insurance company: Manulife or Sun Life or Desjardins, etc. Your copycat pays your exactly as your employer would have, to the cent, with spousal / partner continuance. It must be the same. CRA demand that.
How Does a Copycat Annuity Work?
When you choose to transfer the commuted value of your pension to a copycat annuity, you are effectively converting the lump sum value of your pension into a personal annuity. Here’s how the process typically works:
- Calculate the Commuted Value: The commuted value is calculated based on the present value of the future pension payments you would have received. This amount is based on factors like your age, life expectancy, and current interest rates.
- Transfer the Funds to an Insurance Company: Once the commuted value is calculated, the funds are transferred to an insurance company. The insurance company then uses these funds to purchase an annuity for you.
- Receive Regular Payments: The annuity provides guaranteed monthly income for the rest of your life, much like your original pension plan would have. Depending on the type of copycat annuity you choose, payments can continue for your spouse after your death or include other features such as inflation protection.
The payments from a copycat annuity are designed to be as close as possible to the payments you would have received from your defined-benefit pension plan. This is why it’s called a “copycat” annuity—it mimics the pension while giving you more control over the funds.
Book A Pension Consultation Call - Don't Delay!
Click the button below to book a consultation call with a Certified Financial Planner. With more than 25 years of experience, our approach is clear and practical. We help simplify pension, investment, retirement, estate, and tax planning so you can focus on what matters most. We've had the privilege of advising retirees and employees from organizations such as Ontario Teachers, Stelco, UPS, ArcelorMittal Dofasco, GM, and many others. Book a free 15-minute consultation call today.
Why Would You Transfer Your Pension to a Copycat Annuity?
Transferring your company pension to a copycat annuity offers several advantages that make it an appealing option for certain retirees.
Security of Guaranteed Income
Just like a defined-benefit pension, a copycat annuity guarantees a steady stream of income for life. This is crucial for retirees who want to ensure they won’t outlive their retirement savings. The biggest benefit is peace of mind, knowing that your income is secure no matter what happens with the markets or the economy.
The payments from the copycat annuity are identical or nearly identical to what you would have received from your employer’s pension, so there’s no reduction in your retirement income. The main difference is that the funds are managed by an insurance company rather than the company pension plan administrator.
Protection from Employer Pension Plan Issues
One of the risks of leaving your money in a company pension plan is the potential for the pension plan to become underfunded. If your employer faces financial difficulties or the pension fund isn’t properly managed, you could be at risk of receiving lower payments or, in extreme cases, no payments at all.
By transferring your pension to a copycat annuity, you remove this risk. The insurance company is now responsible for ensuring you receive your payments, and these companies are often regulated and insured to protect policyholders. In Canada, Assuris, a non-profit organization, protects policyholders in the event their life insurance company fails. This adds an extra layer of security that you don’t have with an employer pension plan.
Inheritance and Estate Planning
One of the limitations of a defined-benefit pension is that the payments typically stop when you and your spouse pass away. This means there’s no opportunity to leave the remaining funds to your heirs.
With a copycat annuity, you have more control over what happens to the funds after your death. Depending on the type of annuity you choose, you can include a joint life annuity option, which continues payments to your spouse after your passing. You can also add features such as a guaranteed period or a death benefit, which ensures that the payments continue for a certain number of years or that a portion of the annuity is passed on to your beneficiaries.
Control Over Where Your Money is Held
When you transfer your pension to a copycat annuity, you can choose the insurance provider that manages the annuity. This gives you more control over where your money is held and offers the potential to shop around for the best annuity rates and terms.
This flexibility is valuable for retirees who want more control over their financial future, as it allows them to pick an annuity that meets their specific needs and preferences.
Cash Surplus
Most often, there is more cash from the commuted value than is needed by the insurer. You get the difference!
What Are the Downsides of Transferring Your Pension to a Copycat Annuity?
While there are clear benefits to transferring your pension to a copycat annuity, there are also some potential drawbacks to consider.
Loss of Flexibility
Once you transfer your pension to a copycat annuity, the decision is essentially final. You won’t have access to a lump sum anymore, and you can’t change your mind about how you want to receive the funds. The payments are fixed and will continue for life, but you don’t have the option to withdraw extra money if you face unexpected expenses.
If you value having access to your money or anticipate needing flexibility in retirement, a copycat annuity may not be the best option.
Inflation Risk
Most copycat annuities do not automatically include inflation protection, meaning the payments you receive will remain the same even as the cost of living rises. This could reduce your purchasing power over time, especially if you live for many years after retirement.
Some annuities allow you to add inflation protection, but this feature typically comes at the cost of lower initial payments. If inflation is a concern for you, it’s important to discuss this with your financial advisor and consider whether adding inflation protection is worth the trade-off.
What if my union negociates a better pension in future negociations?
The copycat will NOT capture any future pension improvements that your union may negociate. On the other hand, a copycat normally generates a cash surplus up front that more than makes up for this future possibility. We quarterback this process for you.
Management Fees and Costs
While transferring your pension to a copycat annuity provides security, it’s not without costs. The insurance company that manages the annuity will typically charge fees for managing the funds, and these fees can eat into your returns over time. Additionally, adding features such as inflation protection or a joint life option can reduce the overall payments you receive.
It’s important to weigh the costs of transferring to a copycat annuity against the potential benefits to ensure it’s the right choice for your financial situation.
How to Transfer Your Pension to a Copycat Annuity
If you decide that transferring your pension to a copycat annuity is the right option for you, the process typically involves the following steps:
- Consult Your Pension Administrator: First, contact the administrator of your defined-benefit pension plan to discuss the option of taking the commuted value and transferring it to an annuity. They will provide you with the necessary documentation and calculations of the commuted value. We manage this process for you. You don’t pay us. The insurer pays us.
- Research Insurance Companies: Next, research different insurance companies to find the best annuity products. Look for companies with strong financial ratings and a good reputation for customer service. It’s also worth consulting with a financial advisor who can help you compare annuity rates and terms.
- Choose the Type of Annuity: Decide on the type of annuity that best suits your needs. You may want to choose a joint life annuity if you’re married, or you could opt for a life annuity if you’re single and want guaranteed payments for the rest of your life. Additionally, consider whether you want to add features such as a guaranteed period or inflation protection.
- Transfer the Commuted Value: Once you’ve selected an insurance provider and the type of annuity, you’ll need to arrange for the transfer of the commuted value from your pension plan to the insurance company. This is typically done directly between the pension plan administrator and the insurance company.
- Receive Regular Payments: After the transfer is complete, the insurance company will begin paying you the annuity in regular installments. These payments will continue for the rest of your life (and potentially your spouse’s life, depending on the type of annuity you choose).
Final Thoughts on Transferring Your Pension to a Copycat Annuity
Transferring your company pension to a copycat annuity can be a smart move for those looking for guaranteed lifetime income while maintaining some level of control over their financial future. A copycat annuity offers the same security as a defined-benefit pension, with the added benefits of protection from employer pension plan issues, inheritance potential, and the ability to choose where your money is held.
However, it’s important to weigh the benefits against the potential downsides, such as the loss of flexibility, inflation risk, and management costs. If you’re unsure about whether a copycat annuity is the right choice for you, consulting with a financial advisor can help you make an informed decision based on your personal financial goals and retirement needs.
