Draw Your Defined Benefit Pension or Transfer its Value?
If you stop contributing to a supplemental pension plan (also known as a "pension fund" or "registered pension plan") that guarantees you a retirement pension (defined benefit pension plan), such as when you leave your job, you may be able to choose between receiving the pension or transferring its value into another supplemental plan, savings product, or income vehicle. For more information, see the flash RetirementQuébec information capsule entitled "Retirement savings and Income Vehicles—Make an Informed Choice!"
Note that the calculation of the transfer value is not influenced by your plan's level of solvency. However, the amount transferred to you when you stop working will be based on your plan's level of solvency. If your plan is less than 100% solvent, the difference must be paid to you during the following five years. If your plan is fully solvent, you will receive 100% of the transfer value.
Drawing an Income
Your SPP will provide a life pension, meaning it will be payable for as long as you live. Depending on your age, your pension payments may start immediately or be postponed to a later date. The amount of each payment will vary accordingly.
If you don't start drawing your pension immediately, you may have the right to transfer its value to another vehicle. The total value may be indexed to account for the rising cost of living, either before or after the first payment.
In accordance with the Supplemental Pension Plans Act (for plans registered in Québec), under certain conditions, you will have the right to transfer the value of your pension every five years if you choose to receive a deferred pension.
To find out the terms of your pension plan, refer to your statement of benefits or ask your plan administrator.
Transferring the Value
A number of options are available, including the following popular choices:
- Locked-in retirement account (LIRA), or locked-in registered retirement savings plan (RRSP)
- Life income fund (LIF), or locked-in registered retirement income fund (RRIF) or federal restricted life income fund (RLIF)
- Your new employer's pension plan (if the employer accepts transfers)
- A life annuity purchased from an insurer
You may also be eligible to receive some or all of the value in cash, which will be taxable.
The amount transferable is calculated on the basis of the actuarial standards in effect and the provisions of your pension plan, market conditions (long term interest rates), and your expected lifespan (probability of survival). More generous plans will have a higher transfer value. The lower the long term interest rate, the higher the face value you'll need to finance the pension.
Sums originating in a federally registered plan may be unlocked up to a maximum of 50% under certain conditions.
Advantages of Transferring
- If the financial markets are doing well, transferring the value will probably increase your retirement income. But don't overestimate your ability to select good investments. Even institutional managers have been struggling to generate positive returns.
- If the state of your health significantly reduces your life expectancy, transferring may be a wise choice. Under the terms of your plan, you may also have the option of replacing your pension before you start receiving it with a single lump sum payment or a series of installments.
- Life income funds, and locked-in RRIFs and RLIFs, offer some flexibility in terms of annual withdrawals, although they do have ceilings. If you die prematurely, the balance (amount transferred, plus return on investment, minus withdrawals) will be payable to your spouse or estate. The balance is usually higher than the death benefit guarantee after retirement.
Disadvantages of Transferring
- If you live to an old age or the financial markets are low, your capital will run out. But the lower the transfer value, the lower the risk, since it will have only a minimal effect on income.
- Unlike a retirement pension, which you can split with your spouse at any age to save on taxes, income from an LIF or an RLIF cannot be split until you reach age 65.
- Sometimes attractive fringe benefits are available to retirees, but only to those who draw a pension.
- In some cases, a portion of the transfer value cannot be transferred to a registered plan without being taxed. The taxes payable on the surplus make transferring a less desirable option. Tax breaks for retirement allowances do not apply to this amount.
- If your employer voluntarily indexes pensions or increases payments, and you chose to transfer the value, you'll miss out on these extra benefits.
- If you take a large amount of the transfer value in cash, the immediate tax bill can be costly.
- If you are risk averse and prefer peace of mind, you can choose a life annuity from your pension plan or an insurance company (maximum Assuris coverage of $2,000 per month).
- Investing the transfer value in no-risk vehicles will probably generate a lower income than the annuity. It will be even harder to maintain your income if you live longer than average.
- Look at your other sources of income to help you decide. If your pension plan is a major part of your retirement income and your transfer value eventually runs out, you'll have to rely solely on government programs.
- With a life income fund, the withdrawal limit in the early years may be lower than your plan's pension payments, but the opposite is true in the later years.
- If you are a married retiree or you are living in a civil union and your spouse dies, the value of an LIRA or an LIF (unlike that of a registered pension plan) will be part of the family patrimony and the value might be reduced if your spouse did not designate you to be the heir.
The decision to transfer the value of your pension should not be made lightly. It may be in your best interest to consult more than one financial advisor so that you can be comfortable with the risk transfer involved (longevity and investments) if you decide to renounce your pension.