Phased retirement and pension plans
Are you thinking about retiring, and your employer offers a pension plan? You should know that you can reach an agreement with your employer that will allow you to take advantage of phased retirement. First, you need to know what kind of pension plan you contribute to. Is it a defined contribution plan? Or a defined benefit plan?
Let's look at how phased retirement applies to each of these types of plans.
If you are a member of a defined contribution pension plan
Depending on the existing agreement you have with your employer, you could be offered 2 measures for phased retirement:
- a phased retirement benefit
- a reduction in work hours and a cash payment
Note that both of these options constitute a cash advance from your pension plan. The balance of your account will be reduced accordingly. However, if you continue to work, and are an active member of your plan, new contributions will be paid into your account.
The phased retirement benefit
If you are at least 55 years of age but under 65, this measure could be for you. If your plan authorizes it, you can make an agreement with your employer to withdraw a certain amount from your account — a phased retirement benefit — while continuing to work full-time or part-time.
The agreement must set out the calculation and payment methods for your phased retirement benefit. The amount cannot exceed 60% of the life income ceiling that you would be able to withdraw if the amounts that you have accumulated were transferred to a life income fund (LIF).
Need an example?
Mario is 56 years old and makes an agreement with his employer to receive a phased retirement benefit. On 31 December 2009, he has accumulated 100 000 $ in pension benefits. In 2010, he is entitled to a benefit of 3 900 $ a year, that is, 60% of 6 500 $ (0,0651 x 100 000). The amount will be deducted from the balance of his account. However, if he is continues to be an active member of his pension plan, new contributions will be credited to his account.
The reduction in work hours and cash payment
When you come to an agreement with your employer to reduce the number of hours you work, you can compensate for your loss of income with a cash payment from your plan if you meet certain conditions:
- You must be an active member of your plan
- You must be less than 10 years from the normal retirement age (for example, if normal retirement age is 65, you must be at least 55) or older
You will receive a single payment from your pension plan each year, on the date you chose. It cannot exceed the lesser of:
- 70% of the loss of income resulting from the reduction in your work hours, or
- 40% of the maximum pensionable earnings (MPE) for the year, which are 18 880 $ for 2010.
And if Mario takes advantage of this measure instead? What effect would it have on his income?
At 56, Mario earns 30 000 $ a year. He has accumulated 100 000 $ in pension benefits. He makes an agreement with his employer to reduce his work hours by 45%, which results in a loss of 13 500 $ and lowers his salary to 16 500 $ a year.
In 2010, Mario could receive a maximum payment of 9 450 $ from his pension plan. Why? Simply because the amount that equals 70% of his loss of income, that is 9 450 $, is less than 40% of the MPE for 2010, that is, 18 880 $.
By opting for this measure, his 2010 income will be 25 950 $ (16 500 $ + 9 450 $).
It should be noted that Mario cannot receive a cash payment from his plan and a phased retirement benefit. He must choose one or the other.
What about simplified pension plans?
Phased retirement is also possible with a simplified pension plan (SIPP). Remember that for each member of this type of plan, two accounts are created: one locked-in account and one not locked-in account.
If you are age 55 or older and a member of an SIPP, you can obtain your retirement income by transferring some or all of the amounts credited to your locked-in account. Regardless of your age, you can usually transfer or withdraw the amounts credited to your not locked-in account.
In the case of an SIPP, you can obtain a transfer or a cash payment without reducing your work hours or making an agreement with your employer.
If you are a member of a defined benefit pension plan
You can use the same measures for phased retirement as the members of a defined contributions plan. However, certain conditions apply in the case of a phased retirement benefit.
The phased retirement benefit
If your plan allows it, you can make an agreement with your employer to receive a phased retirement benefit while continuing to work full-time or part-time. You must, however, be:
- at least 60 years old (or at least 55 years of age if you are receiving an unreduced early pension or are entitled to one)
- under 65.
The agreement must set out the calculation and payment methods for your phased retirement benefit. The amount cannot exceed 60% of the amount of the pension to which you are entitled or are receiving. The phased retirement benefit does not reduce the amount of your pension.
Furthermore, depending on your plan's provisions, you could also accumulate new pension benefits, which would increase the amount of your pension.
The reduction in work hours and cash payment
When you come to an agreement with your employer to reduce the number of hours you work, you can compensate for your loss of income with a cash payment from your plan if you meet certain conditions:
- You must be an active member of your plan
- You must be less than 10 years from the normal retirement age (for example, if normal retirement age is 65, you must be at least 55) or older
You will receive a single payment from your pension plan each year, on the date you chose. It cannot exceed the lesser of:
- 70% of the loss of income resulting from the reduction in your work hours, or
- 40% of the maximum pensionable earnings (MPE) for the year, which is 18 880 $ for 2010
However, the payment is a cash advance from your pension plan that will reduce your benefits by an amount equal to what you receive. Although, by continuing to be an active member of your plan, you will continue to accumulate new benefits.
Note that the measures cannot be combined: you must choose between the phased retirement benefit and the cash payment from your plan.
For more information
- Reference rate for life income funds (LIF) in 2010 for a person 56 years of age on 31 December 2009.