If you have been a member of a pension plan for a number of years, the benefits you have accumulated in the plan could be an important (possibly your primary) source of income in retirement.
When you leave your employment, voluntarily or not, you may have to decide what to do with this benefit. The options can be varied and in some cases, confusing. Once you have made your choice, there is no turning back. That is why it is essential that your decision is a fully informed one.
This is how the process typically works:
At the point of termination the company will provide a written outline of your company pension plan options. Watch for a deadline being stipulated for your response. Without a response within the required timeframe you may end up with a default option that is either not your preference or not to your best advantage. Typical options include:
Leave your funds in the pension plan
1. Hassle free – One of the advantages of this choice is that all investment decisions are made for you in exchange for a lifetime income. Before selecting this option, you want to be comfortable that the pension plan is solvent and the company is in good financial shape. Even then, the health of the pension plan, and company, is subject to change/deterioration over the length of your retirement. This used to be of little concern to pensioners until the recent financial crisis highlighted underfunded pension plans. Pensioners of some of Canada’s premier employers (i.e. Nortel) will be experiencing significant pension income reductions as a result of underfunded pension plans.
2. Choose an appropriate spousal benefit – If you are married, you can elect that your spouse receives the same income, or a somewhat reduced income for their life in the event of your death. Making this election requires a trade off for lower income during you life. Given the uncertainties of life, we generally recommend electing a 50% spousal benefit at minimum. Anything less generous that will typically require the spouse to acknowledge the choice in writing.
3. Medical Benefits – Another benefit of the pension option may be medical benefits that may accompany the pension. Depending on the extent of the benefits, this could be a very valuable part of the pension option.
Commuting to a Locked In Retirement Account (LIRA)
1. Contol – The greatest benefit of this option is control; control over how the pool of capital is invested, and control over access to the capital itself (liquidity).
2. Liquidity – Lump sum withdrawals in excess of the monthly pension are not permitted, but LIRAs allow them within certain limits. In addition, at the time of transfer from LIRA to a Locked in Retirement Income Fund, unlocking provisions can provide additional liquidity if taken advantage of. You may never need to take advantage of the additional access, but it is nice to know the option exists in an emergency.
3. Premature death – In the event of the premature death of the pensioner without a spouse, the remaining value of account is available to the estate or designated beneficiary. In the case of a pension, without a guarantee period, the remaining capital is absorbed by the pension plan to be used to pay pensioners who live longer than expected.
4. A risk – One of the risks of choosing the transfer to a LIRA is of making poor investment decisions that erode the value of the benefit prematurely. Obtaining experienced advice is, therefore, important.
The decision to commute or not to commute is a complex one as there are many variables to consider. Make sure that you get advice, and that the advice is impartial and considers a full range of variables and your unique circumstances.
This information is of a general nature and should not be considered professional advice. Its accuracy or completeness is not guaranteed and Queensbury Strategies Inc. assumes no responsibility or liability.
