Making an Election for your Defined Benefit (DB) Pension

Employers guarantee a specific retirement benefit for each employee who participates in their defined benefit pension plan.

The benefit a participant receives is based on a formula, which is typically the product of years of pensionable earnings, a benefit percentage and final or average earnings. The employer is responsible for funding the pension plan and bears the investment risk of ensuring the plan has sufficient funds to pay their retired employees. When a member of the pension plan leaves their employer, they will need to make some important decisions about their pension. This article will discuss the two most common options that are available to participants when employment has ended. It is important for participants to carefully evaluate the options presented as the decision is often irreversible.

1. Stay-in Pension Plan

Depending on your age, if you elect to stay in the pension plan, you may have the option to start your pension benefit immediately or defer it until a later date.

If you have a spouse, they have a right to the pension under pension legislation. As a result, your pension options will default to a joint pension with a survivorship. You may be given options to have 100%, 75%, 66.67% or 50% of the income continue to be paid to the surviving spouse.

DB pension plan payments are one of the few types of pension income that you can receive before age 65 that qualify for pension income-splitting with your spouse, as well as the $2,000 pension income tax credit.

Another decision is to choose the appropriate minimum guarantee period. In most cases, you can choose a 15-year, 10-year, 5-year or no guarantee period.

Your DB plan can be at risk if the company sponsoring the plan runs into financial problems and cannot make the required payments. It is important to analyze the financial viability of the company. If the company goes bankrupt while there is a pension deficit (pension liabilities > pension assets), your promised or current pension benefits may be reduced.

2. Transfer Pension Value to a LRSP/LIRA

Your pension administrator will calculate the commuted value of your pension that can be transferred to a locked-in RRSP (LRSP) or locked-in retirement account (LIRA). Once you transfer the pension funds to a LRSP/LIRA, you have a wide range of investment choices available. The value of your locked-in plan will fluctuate directly with your investment returns.

You will have control over the amount of income you receive, within minimum and maximum amounts, giving you greater control over your taxable income. This may help you maintain your eligibility for government benefits like Old Age Security (OAS).

The Income Tax Act may limit the amount of pension money you can transfer to a LRSP or LIRA. Your pension plan administrator will inform you that a portion of your commuted value could be paid to you as a taxable cash payment.

When analyzing which pension option is best for you, the goal is to find the option that will provide you and your spouse with the best cash flow throughout your retirement at a risk level that is acceptable to you. Your RGF Integrated Wealth Management advisor can prepare a customized analysis of your situation and recommend a plan that is unique to your specific personal goals and circumstances. ■

Business Owners

The most overlooked area of financial planning for business owners and incorporated professionals is the lack of integration between corporate and personal assets. When the majority of your assets are in your corporation you need very specific, specialized and personalized financial advice.

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