If you’re a Toyota employee nearing retirement or recently laid off, you’ve probably heard about different pension options, including the copycat pension or copycat annuity. While you might be familiar with the traditional pension plan offered by your employer, the copycat pension is a lesser-known option that can provide the same benefits, but with more flexibility and control.
In this guide, we’ll break down what a copycat pension is, how it works, and why it might be a great option for your retirement, especially if you’re considering moving your pension funds away from Toyota.
What Is a Copycat Pension?
A copycat pension, also known as a copycat annuity, is essentially a mirror of the pension plan offered by your employer, but with a different provider— an insurance company like Sun Life. The beauty of a copycat pension is that it provides the exact same benefits as your employer’s pension, right down to the payment structure, spousal continuance included. Yes, the copycat also matches the bridge or transition payments to 65.
For example, if Toyota offers you a pension that provides income for life, plus a bridge benefit until you reach age 65, the copycat pension from Sun Life or Desjardins Insurance or another provider will offer the same benefits, guaranteed. This is mandated by the Canada Revenue Agency (CRA), so the terms can’t be less favorable than your original pension plan. It’s essentially a replica of what Toyota offers, but with the flexibility of moving your pension to a private provider.
How Does a Copycat Pension Work?
The process of setting up a copycat pension is pretty straightforward. Here’s how it works:
- Get your pension statement
First, you’ll receive a pension statement from Toyota outlining your retirement benefits. This document shows how much you’ll receive in pension payments and any additional benefits, such as a bridge benefit. - Find a copycat provider
Once you have your pension statement, you can approach an insurance provider like Sun Life. You can think of this as making a “copy” of your pension. The new provider will offer the same guaranteed pension payments as your Toyota pension, but now you’ll have moved the responsibility to a private insurance company. - Exact same payments, new provider
The copycat pension is required by law to offer the same payout as your Toyota pension. This includes both the pension for life and the bridge benefit (if applicable), which stops at age 65. It’s a simple transition—think of it like crossing out “Toyota” on your pension plan and replacing it with “Sun Life” or another provider.
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Why Interest Rates and Commuted Value Don’t Affect Copycat Pensions
One question Toyota employees often ask is how interest rates or commuted value affect the copycat pension. The answer is simple: they don’t.
While interest rates impact the commuted value of your pension, this doesn’t apply to the copycat pension. Here’s why:
- Commuted value is irrelevant
The commuted value of your pension is the lump sum that represents the present-day value of all your future pension payments. This value changes with interest rates, but when you choose a copycat pension, your employer’s actuary makes a calculation based on interest rates that day or week. Then the insurance company actuary makes the same calculation. So interest rate changes and changes to the commuted value are already built into the calculation. The insurance company is only concerned with providing the same monthly payments that Toyota offered. - Guaranteed payments, regardless of commuted value
The insurance provider calculates how much they need to guarantee your pension payments for life. Even if your commuted value has dropped due to higher interest rates, this won’t affect the pension payment amounts you receive from your copycat pension. The provider will guarantee the same payments, so don’t worry about fluctuations in your commuted value.
The Benefits of a Copycat Pension
Choosing a copycat pension can offer several advantages, especially if you’re looking for more flexibility with your retirement funds. Here’s why it might be a great option for you:
- Same pension, different provider
You get the exact same guaranteed payments as your Toyota pension, but from a different provider. There’s no risk of losing benefits or seeing reduced payments. - Control over your pension funds
With a copycat pension, your retirement savings are moved to an insurance provider, which means you have more control over how your funds are managed. In some cases, you may even end up with a cash surplus after the transfer. This can provide extra flexibility for your retirement plans. - Cash surplus: In most case, you will receive extra cash from the copycat, likely 1% – 10% of the commuted value.
- Peace of mind
By moving your pension to an insurance company, you protect your retirement income even if Toyota faces financial difficulties down the road. Your pension is safe, and you don’t have to worry about changes to your employer’s financial situation impacting your payments.
What About Surplus Cash?
In many cases, when you transfer your pension to a copycat annuity, there may be a cash surplus. This happens when the insurance provider determines that they don’t need 100% of the funds to guarantee your pension payments.
For example, Sun Life might calculate that they only need 95% of the funds available from your commuted value. The remaining 5%—which could be $20,000 or more—comes to you as cash. This surplus cash, which is taxable income, can provide an added financial cushion for your retirement, allowing you to use the extra money for investments, travel, or any other needs.
Why Copycat Pensions Are Gaining Popularity
Copycat pensions have become increasingly popular among auto workers and employees at large corporations like Toyota. Here’s why:
- Flexibility: Employees appreciate having control over their pension funds and being able to move them to a provider they trust, such as Sun Life.
- Security: By transferring your pension to a large, reputable insurance company, you know your retirement income is secure, regardless of any changes with your employer.
- Extra benefits: The possibility of surplus cash makes the copycat pension an attractive option for those looking to maximize their retirement benefits.
FAQs About Copycat Pensions for Toyota Employees
Does the commuted value impact my copycat pension?
No. The commuted value is irrelevant when setting up a copycat pension. The insurance provider guarantees the same payments as your Toyota pension, regardless of how interest rates affect your commuted value.
Surplus cash: can I receive cash when I set up a copycat pension?
Yes. In most cases, the insurance provider doesn’t need the full amount of your pension funds to guarantee your payments. This leaves a cash surplus that you can receive as a lump sum, taxable, which you’re free to use as you wish. Or deposit to your RRSP to avoid tax.
Will my pension payments be the same with a copycat pension?
Yes. The Canada Revenue Agency (CRA) mandates that the copycat pension must offer the exact same payments as your employer’s pension plan. You’ll receive the same guaranteed income, including any bridge benefits.
Is a copycat pension safe?
Yes. Copycat pensions are managed by large insurance companies like Sun Life, which are regulated and stable. This ensures that your retirement income is protected, for life.
Assuris: This is like an insurance policy on insurance companies. Your copycat pension payments are protected under Assuris protection. Here’s an example from the Assuris site: if your monthly payment is $3,500 then your protected amount remains $3,500. Amounts over $5,000 per month are protected up to 90%. Remember, Assuris steps in only if your insurance company fails.
Why should I consider a copycat pension?
A copycat pension offers the same benefits as your employer’s pension but with the added flexibility of moving your funds to a trusted insurance provider. This can offer peace of mind, especially if you’re concerned about your employer’s financial future.
