Canada, along with the rest of the world, has experienced business closures, travel restrictions and shifting public health guidelines for months. These shutdowns have had significant consequences for our economy, but perhaps the most glaring impact has been on our labour market. According to Statistics Canada’s May Labour-Force Survey, the unemployment rate rose to 13.7%. This is the highest level in more than four decades of comparable data.
For those who have lost their jobs, or planning to leave a job voluntarily, the onus is on you to consider the variety of financial implications that arise. Of these potential issues is to figure out what path to take with your pension plan. A client of mine recently brought to my attention the challenge involved with transferring out her previous employer’s pension plan, particularly during a pandemic with many administrators unavailable. Understanding your pension options as well as the timelines involved is of great importance.
What actually happens to your pension when you leave an employer?
Soon after your departure, the administrator of your pension plan will provide a summary of your benefits in writing. This statement must include the benefits payable to you from the plan, the options for what you can do with those benefits, as well as a strict deadline for selecting an option. There is often not much time to make a decision, and the initial transitory period after leaving an employer is when most problems occur because people tend to be otherwise occupied and forget to make a selection. If a choice is not made before the deadline, a default option will be selected on your behalf; And it may not be the ideal selection for your own unique circumstances.
To prevent this from happening, it is prudent to stay alert upon leaving or switching employment and note down any deadlines. It is also crucial to understand in advance what pension options are available to you. Here are some common ones that you can consider.
1) Leave your pension with the previous employer
Assuming that this is allowed by your previous employer, this option entails that you would be able to remain in the company’s pension plan albeit without the ability to make additional contributions. However, a disadvantage of this option is that you will have to contact them down the road to withdraw your pension upon retirement. The financial health of the company and the funding position of the pension plan should be monitored to ensure the company is not at risk of cutting pension benefits.
2) Transfer to a new employer pension plan
If you have decided to take on a position with another company, a potential option is transferring a vested amount of your previous pension to the new employer’s pension plan. This is possible if both your new and previous employer approve of the transfer.
3) Purchase an annuity by transferring to an insurance company
You may also have the option of transferring your pension to an insurance company to purchase an immediate or deferred annuity, which guarantees periodic payments to you or a beneficiary during retirement. While this is relatively safe (barring any bankruptcy by the insurance company), you will have no say in the management of the fund and the transfer is not reversible. The projected income that you will receive from the annuity should be compared to all other available investments. However, you should keep in mind that the funds are locked-in until you retire.
4) Transfer to a LIRA/ locked-in RRSP
If you would prefer more autonomy over your pension, then perhaps the most widely chosen option would be to transfer the accumulated value of your pension to a locked-in retirement account (LIRA) or a locked-in RRSP (LRSP) with a financial institution. Upon transfer, you will find a wide range of investment options available to you across all asset classes including cash, fixed income, and equities. Some benefits include 1) being able to invest according to your risk tolerance, 2) having tax-sheltered growth until you begin withdrawing, 3) controlling the amount of taxable income you receive from the pension, and 4) being able to consolidate all previous pensions into a lock-in registered retirement plan. Your advisor can work with you to both set up this plan and integrate this account into your overall wealth planning.
For those with a longstanding tenure in a company pension plan, the accumulated funds could prove to be a significant portion of your retirement income. As with most financial decisions, you should consider the pros and cons of each option. The above-mentioned options are not an exhaustive list. Work with your advisor to decide what would be the best option to protect your hard-earned pension that will benefit you and your family in the long run.