If you have a defined benefit pension plan and are retiring or leaving your employment, you may be presented with different pension options.
Depending on the terms of your pension plan, you will be offered any or all of the following choices: Lifetime pension from the pension plan, lump-sum transfer to a locked-in RRSP, or a transfer to life income fund (LIF) or locked-in retirement income fund (LRIF).
Depending on how long you worked for your employer, the lump-sum payments may be substantial and may have a taxable component.
Consider The Variables
Making the decision to remain with your pension plan or take a lump-sum payout is not straight forward and a number of factors must be considered before you make a decision.
These factors can be both financial and non-financial. Financial considerations include:
- The impact taxes will have on any lump-sum payments,
- Your RRSP contribution limit and any pension adjustment reversal,
- You anticipated tax rate during retirement,
- Your current age,
- Your health and projected life expectancy,
- Your spouses age and life expectancy,
- Survivor benefits,
- Bridging benefits available from the plan if you are retiring early,
- Federal or provincial pension legislation, and
- Your tolerance for risk and desire for control.
Any of these factors can have a significant impact on your decision.
For non-financial considerations, please see our article Job Loss And Your Retirement Pension Options.
Know The Present Value
Comparing the pension payments to the lump-sum is not as simple as adding up all of the payments.
Financial professionals will consider a reasonable rate of return you might expect and calculate the value of your pension in today’s dollars to make an accurate comparison of the lump-sum and annuity options. However, there are minimum and maximum amount hat can be drawn during retirement that can further complicate the comparison.
Getting Help: Beware Of Quick Advice
When you look for independent help with your decision, beware of any advisor who has a quick answer or uses a general rule. 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 looking for looking for an objective opinion on your pension, please feel free to contact me for a quote.