When Toronto-based marketing professional John Tabone left his job of 19 years with a national professional association, the 45-year-old had to decide what to do with his sizable defined benefit pension.
He could leave it alone and receive about $16,000 a year in retirement, or take a lump sum payout of the pension’s commuted value and invest a portion in a locked-in retirement account (LIRA) with the balance received as cash.
Consider your employer’s viability. If there’s a chance the company could become insolvent then a portion of your payout may be at risk.
“The deferred annual pension would be guaranteed for life. But if inflation went up, in 20 years that amount might not seem so great,” says Tabone, whose pension would not be adjusted for inflation. “On the other hand, if I invest myself and the market tanks, I could end up with a lot less money.”
Tabone’s dilemma isn’t unique. Figuring out what to do with a corporate pension after a job change can be challenging, says Craig Hughes, director of advanced financial planning at IG Wealth Management. “There’s no one right answer, as every individual’s circumstances are different,” he says.
Hughes suggests taking the following steps before deciding whether to keep, exit or transfer a defined benefit or defined contribution pension plan.
Check your RRSP room
When you take a lump-sum pension payout, only a portion can go directly to a LIRA in a tax-deferred transfer. The rest will be paid out in cash and is taxable, so it is typically advisable to defer tax as much as possible by contributing cash to an RRSP. “If you don’t have enough contribution room left in your RRSP, you’ll take a big tax hit,” says Hughes.
Read the fine print
Defined benefit plans promise an income in retirement for life, for you and a surviving spouse. That payment is based on a formula, which is usually related to your years of service multiplied by an average of your best years of earnings. Some plans might allow you to continue to receive group health benefits, which can be strong incentives to stick with the plan, says Hughes.
But dig into the details. Find out if your plan offers a bridging option which can provide increased payments prior to age 65, and how much your spouse would receive annually upon your death. Determine if your pension income will be indexed for inflation, which is especially important if you are years away from retirement, as was the case for Tabone. Also, consider your employer’s viability. If there’s a chance the company could become insolvent then a portion of your payout may be at risk, says Hughes.
Assess your defined contribution plan
Deciding what to do with a defined contribution (DC) pension plan is more straightforward, given that those savings are based on how well your investments perform in the market or whether they remain in the plan or get invested in a LIRA.
The main differences between a DC plan and a LIRA are investment options, fees and flexibility, says Hughes. “If your defined contribution plan is limited to a few cookie-cutter investment portfolios, you might want to consider a LIRA that has a broader suite of options,” he says. Do your homework, says Hughes.
Look at your whole situation
Before making a final decision about what to do with your corporate pension, consider your other sources of retirement income, including CPP and OAS, RRSPs, RRIFs and TFSAs. If you have other savings, then leaving your pension plan as is may be the way to go.
Also, think about the estate planning implications that can come with both spouses having a defined benefit plan. While any unused retirement savings in a LIRA or RRSP can be left to heirs, payments from a defined benefit plan cease upon the death of the plan member or spouse.
That was one of the main reasons why Tabone, after all his deliberations, decided to take a payout of the commuted value of his pension. “My wife is a teacher,” he says, which means she’s a member of the Ontario Teachers’ Pension Plan. “If I stayed in my defined benefits plan and we both die young, we would lose out on passing on those retirement savings to our kids.”