If you are a member of a pension plan, you cannot withdraw your contributions until you retire or cease to be a member of the plan. However, when you do retire, your employer may provide you different options for your pension.
You may be offered lump-sum payments, Regular annual pension income, Bridging benefits, or any combination of these options.
Making the right choice can be challenging and you may need the assistance of a professional financial planner or accountant. Hopefully this information will help you to take the choice that’s right for you.
Lump-Sum Payments From A Pension Plan
You may be given the option of receiving your pension as a lump-sum payment known as a commuted value. This lump-sum payment is an estimate of the present value you would need to invest today to generate the benefit provided by your pension plan.
A portion of the commuted value must be transferred into a locked in retirement account which is a special kind of RRSP that has limits on how much can be withdrawn from the plan.
A portion of your commuted value payment may also include a fully taxable payment. This amount is known as an ineligible amount and may be a significant amount.
Regular Pension Income
If you are at retirement age, you will be offered one or more regular monthly pension options. These payments will be in the form of a Registered annuity that will be fully taxable when received.
The payment option may be the same amount per month for life or annually increased with the rate of inflation. You may be required to have survivor options for your spouse and the amount the spouse would be guaranteed may be 60% of the full pension or more.
If you are entitled to retire early, you may be offered a bridging benefit. The bridging benefit is a special form of payment that is intended to compensate you for Old Age Security and full Canada Pension Plan benefits you cannot receive until age 65.
Making The Right Pension Choice
When making the decision to take a lump-sum or other payment options, you need to consider your own personal situation.
If you are evaluating the various options, you should consider rates of returns on investments in retirement, your projected life expectancy, and income taxes. However, avoid making a decision based solely on financial data alone.
Other pension considerations you might want to think about might include your life expectancy, need for capital, or other benefits that may come with the regular payment options. Take a look at our article on Other Pension Considerations for more information.
Get Objective Advice
When you look for independent help with your decision, beware of quick answers or “general rules”. Many financial advisors are commissioned salespeople who receive the bulk of their compensation from selling investment products and may be motivated to encourage you to take a lump-sum.
A fee-only planner or other fee-only financial professional is in a better position to provide an objective evaluation of your personal situation. Since you are paying only for their advice, you can be assured that the answer is not motivated by a desire to sell you an investment product.
If you are faced with the decision to take a pension or lump-sum, I can provide you with an objective analysis and recommendation tailored to meet your specific needs.
Contact me today to discuss how I can help you with your pension.