If you are changing employers (voluntarily or through a layoff) or making plans to retire and you have a defined benefit pension plan, you will need to decide whether to leave the money where it is, or transfer it in a lump sum to a locked-in RRSP/locked-in retirement account (depending on the province your plan is governed by). The issue is a complex one, and you should consider it carefully with your financial advisor before making your decision. Here are 5 factors to consider first:
Public Sector or Private Sector Worker
If you work in the public sector, your pension is probably pretty secure and is likely indexed to inflation and so keeping the funds in your existing pension plan versus transferring to a locked-in RSP or a locked-in registered account (LRSP and LIRA) may be a better option for you. However, your financial advisor can do some calculations to determine the most financially sensible choice.
Private sector plans don’t always have the same level of security or inflation hedge as the public sector plans. If this is a concern to you, especially if you are several years away from retirement, it may make more sense to transfer the pension funds to a LRSP/LIRA giving you more control over where and how the monies will be invested.
Your Overall Health
Your health matters when you are considering your options for your defined benefit pension plan because your benefits will continue for life. If you are in excellent health and have longevity in the family, you may want to consider staying in the pension plan to maximize the benefits you will receive, especially if the plan offers an inflation hedge. For example, $950 a month from retirement until age 98 with an inflation hedge is a great overall pension payout. If you are considering a LRSP or LIRA, could you realistically derive the same pension benefit managing it yourself or with the help of your financial advisors?
Now if your own health is poor and you anticipate your life expectancy will be shortened as a result, taking the lump sum may be the better option. Again, $950 a month from age 65 to age 71 is not as great a payout as if you had lived to age 98. Why is a LRSP a better option? Under pension legislation there are unlocking provisions available for shortened life expectancy, hardship, small dollar pensions and from 2010 onwards, some pensions allow for 50% of the total money transferred to be unlocked. In other words, some of your LRSP/LIRA may be able to be transferred into a regular RSP. Why is this a benefit? Within LRSP/LIRA, you have withdrawal restrictions up to a maximum amount each year. A regular RSP has no maximum withdrawal restrictions. You can withdraw as much of your funds as you like; however, you will have to claim the monies as earned income and pay tax accordingly.
Ask your financial advisor if your particular pension or your existing health issues allow for unlocking.
Stability of the Pension Plan
Not all pension plans are healthy, and you need to know whether the one you have been contributing to is solvent or not. If you have concerns about the health of your employer’s pension plan, it may be a good idea to talk with the plan administrator or with your financial advisor to see what your options are. It might be better to transfer the money out rather than risk losing out on a benefit that you are relying on in retirement.
Your Comfort Level with Managing Money
One of the benefits of a pension plan is that there is a fund manager who makes decisions about investments and how to manage the capital while you get a pension cheque every month.
If you choose to transfer the monies to a LRSP/LIRA, you will be managing the funds yourself. However, you won’t be entirely on your own; a financial advisor can help you make decisions about how to invest your money to get the retirement income you need.
Your Ability to Tolerate Risk
The market is constantly changing and if you are a person who is going to feel nervous about small fluctuations in the value of your investments, you may be better off leaving your money in a defined benefit pension plan. A person who is willing to hang in and ride out changes in the market over a longer term may do better taking the money in a lump sum.
Are you facing a choice about a pension versus lump sum payment? As an experienced financial advisor, I can help you determine which one makes the best sense for you. Contact me for a personal consultation.