If you have lost your job or retired, you may need to make some decisions about your retirement pension. Should you take the pension from the employer and which version? Should you take the lump-sum payment? What are the annuity options?
Up and above the financial considerations there are other factors to consider when evaluating your pension options.
Marriage
If you are married and concerned that the survivor benefits may not be enough you might consider taking the commuted value. On the other hand if you want a guaranteed income stream, consider an annuity or taking the employers pension.
Your Spouses’ Age
If you spouse is younger than you, you consider taking the pension since there are guaranteed survivor benefits to provide for your spouse.
Your Health
If you are in poor health, taking the commuted value of your pension may ensure there are assets to pass on to your spouse or your heirs.
Life Expectancy
If longevity runs in your family then leaving the funds in the pension plan and opting for the monthly benefit may make sense because there is no risk of outliving their capital with the pension payment.
Control
Do you feel the need to make your own investment decisions or do you just want to receive a stead stream of income.
Income Splitting Before Age 65
A pension payment is eligible for income splitting before age 65 but a payment from a registered account is not. If this is important to you then consider taking the pension from the plan.
Inflation Protection
Inflation protection is an expensive option to replace. If the you are entitled to inflation coverage as part of the pension then leaving that cost to your pension provider may make sense.
Future Stability of The Pension
Is your pension provider financially stable? If not you should consider taking the commuted value or other options that allow you take control or shift the assets elsewhere. There is nothing worse than being in retirement and having your pension cut because your pension provider is financially unstable.
Tax Considerations
There may be a portion of your pension that is considered ineligible to directly transfer to a locked in RRSP. This ineligible amount is fully taxable when received and if large enough may alter your decision to take the commuted value.
Remember that if you have sufficient RRSP contribution room they may be entitled to shelter more than just the eligible amount.
Survivor Benefits
What rate is the Survivor benefits paid at as a percentage of the monthly benefit? The larger the replacement rate the more attractive the option may seem, but you may be taking a larger reduction in their monthly benefit to pay for this enhanced benefit.
Fringe Benefits
Will commuting the value of the pension mean that you lose other benefits? (i.e. Drug Coverage, Life Insurance). Depending upon what circumstances you may be eligible to receive other benefits from your former employer. If selecting the commuted value means these benefits will need to be replaced then you will need to consider these costs into determining which option you will take.
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{ 2 comments… read them below or add one }
I am a single mother-separated for 6 years-I am providing a home for my children.
I would like to pay off debt and would like to de-register my RRSP’s which have a loss of approximately 50%. Can I apply for a Capital Loss Credit on my next income tax.
Thank-you
Robin St Denis
@ Robin:
With an RRSP you deduct you contributions from your income and add your withdrawals to your income. Inside the RRSP, investments grow tax free and losses also occur tax free. This means that losses cannot be claimed.
The de-registration of your RRSP would mean the value of your RRSP would be added to your income for the year.
As an example: Assume you have employment income of $40,000 and an RRSP worth $50,000.
The basic income tax on your employment income would be roughly $7,000.
If you de-register your RRSP, the full value of $50,000 is added to your income, increasing your taxable income from $40,000 to $50,000. You would have to pay an additional $17,700 of income tax.
Now your bank will only withhold 25% of the RRSP withdrawal or $6,250, so when you file your taxes you will have to actually pay $11,450.