Pension Considerations – One of the Biggest Decisions of Your Life



Teresa Black Hughes

Financial Advisor, Associate Portfolio Manager and Director


Called the Great Resignation, since the pandemic, employees are leaving the workplace/workforce or switching jobs in droves.

The mass departure is happening at all levels of work, but is especially evident in service and retail jobs – many are traditionally low-wage roles and essential workers. Right now, people are “opting out” of the labour force – despite all of the available job openings.

This labour shortage is going to affect another big technology trend – but that’s the subject of another discussion with your RGF advisor. If you are part of the workforce offered or accepting a payout, this could be one of the biggest decisions you make in your life.

What to Know about the Pension Plan

Consider the stability of your pension plan – is the plan fully funded? Does it have a surplus? Do you have the confidence that the employer and the plan will uphold their obligations to plan members?

Is the pension plan monthly benefit indexed, and if so, on what basis? Some plans are indexed at the whim of management, some are increased on a formulaic basis to keep up with inflation, and some are not indexed at all.

You Have Three Options

1. Take the pension at age 65 (though some plans may provide an incentive to receive the full pension at age 55).
2. Take the commuted value of the plan (defined benefit plan), if under age 55.
3. Purchase a life annuity (if plan is held as a defined contribution plan).

What to Think about for Yourself

Identify any biases (strong emotion), you may have for your employer. If you’ve been laid off and are unhappy with your employer, you may jump at the chance to commute your pension. Alternatively, if you feel a sense of loyalty to your employer, you may lean toward keeping your pension monies in the plan. It is important to keep emotions out of the equation and do the retirement planning.

Life expectancy and health – we simply don’t know how long we’ll live. Is it important to leave a legacy to your family? If you determine to take the pension, you will be presented with a number of options guaranteeing a minimum number of payments – based on your life and the life of your partner. If you die after the guarantee period there is no estate residue for your family. If you are planning on the joint retirement lives of you and your spouse, it’s a good idea to look at the joint and survivor options. The difference in benefit to provide continuance to one’s spouse may be small for the surety of ongoing income. If you have a health condition that you believe will shorten your life expectancy, then taking the commuted value and being able to see the value passed along to heirs may be of benefit.

Registered Retirement Savings Plans (RRSPs) can be converted to Registered Retirement Income Funds (RRIFs) or life annuities (or cashed out) prior to age 71. (If the monies are in a Locked-in Retirement Savings Plan (LRSP), they cannot create income prior to age 55.) Life annuities are supported by a goodly portfolio of bonds. But interest rates are very low, and so annuity payments are very discouraging.

Perhaps the layoff affords you the opportunity for employment elsewhere and cash flow flexibility. In the case of the pension, once payments have commenced, there is no looking back. If the pension is commuted to an LRSP, you can choose to defer the payment to as long as age 71, start to draw before then, and even commute the Life Income Fund/Retirement Income Fund (LIF/RIF) back to the LRSP/Locked-in Retirement Account (LIRA) if you don’t need the income yet.

Some folks will choose to commute the pension in order to maintain control – control of the investments, the income, and the legacy.

If you have a spouse, monies in an LRSP may only be afforded the beneficiary designation of your spouse. Special circumstances may apply depending on jurisdiction and marital status.

Taxation of the commuted value of the pension plan – at the time the pension monies are “commuted” (transferred to the control of the former pension member), most of the monies are provided on a tax-free rollover, but part will be taxable. If you have RSP contribution room, you may be able to “contribute” some or all of the taxable portion, to minimize the tax. Part of your planning may include how to use the taxable portion for debt reduction, topping up your Tax-Free Savings Accounts (TFSAs), or bridging income until your next job.

Rollover of the LRSP/LIF to spouse without tax – like the RSP/RIF, the LRSP/LIF will be rolled over to the spouse beneficiary without income tax.

Tip – Be sure to name a beneficiary of the RIF or LIF, as this is a new plan. The beneficiary designation of the RSP or LRSP does not carry forward. In the province of British Columbia, the attorneys may create a new beneficiary designation if the designation is made in an instrument that is renewing, replacing, or converting a similar instrument made by the adult while capable, and the newly designated beneficiary is the same beneficiary that was designated in the similar instrument.

Tip – Consider drawing the annual maximum from the LIF until age 65 and then reduce to minimum if the higher draw may cause the Old Age Security (OAS) to be clawed back.

Tip – Compare the retiree group health and dental plan to other market plans. Staying on a group plan should not be a single driving reason to keep with the pension plan, but it is important to understand the benefits and cost. Retiree plans generally provide less coverage than fully employed members. This may be less of an issue if your partner has a plan that you can participate in.

A company pension plan is a fundamental part of any financial plan. The decision of whether to commute or not involves many complex variables. Your financial planner should model different financial scenarios so that you can see a range of possible outcomes. The choices you make on what to do will have long-term implications. It is important to call upon your personal financial advisor at RGF to help you assess the options. ■

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