Financial Focus: Pension plan options when you leave your employer
By Medicine Hat News on December 2, 2017.
Leaving an employer can often be an emotional time. Whether you are leaving your employment voluntarily or involuntarily, there are generally three main financial issues that need to be considered: 1) retiring allowance planning; 2) pension plan options; and 3) salary continuance and company benefits.
It is important to carefully evaluate the options presented to you as the decision is often irreversible. This article will discuss four common options for a pension plan that may be available when employment has ended.
If you have been a member of a pension plan for many years, the benefits that you have earned in the plan may be the largest source of income you will receive in retirement.
When you leave your employer, your pension plan administrator will send you a written summary outlining your company pension plan options. You will be required to select one of the options by a specific deadline. Sometimes you may not have very much time to make your decision. Generally if you do not act before the deadline, the administrator may consider that you have chosen one of the options by default, which may or may not be the best option for you. The options available vary significantly from one plan to another. Some of the more common options include:
Option 1: Remain in the pension plan
Option 2: Purchase an annuity
Option 3: Transfer your pension value to a LRSP /LIRA
Option 4: Transfer your pension to a new employer
Each option has different benefits and restrictions. It will depend on whether you are getting ready for retirement or transitioning careers.
If you ceased being a member of a registered pension plan (RPP) or a deferred profit sharing plan (DPSP) in 1997 or later and received the commuted (lump sum) value of your RPP or DPSP out of the plan and chose option 2, 3 or 4, you may now have extra RRSP contribution room due to the pension adjustment reversal (PAR). If you receive a PAR amount, this value can be added to your current RRSP contribution limit.
The following are the main considerations that are likely to influence your decision as to which pension plan option, or combination of options, is best for you and your family:
Flexibility to access regular income and lump sums
Benefits available to your surviving spouse or others upon death
Investment management — degree of your involvement in making decisions
Investment risk — impact of strong or weak investment performance on your retirement income
Access to ancillary benefits that may be contingent on membership in the company pension plan
This article outlines several strategies, not all of which will apply to your particular financial circumstances. The information is not intended to provide legal or tax advice. To ensure that your own circumstances have been properly considered and that action is taken based on the latest information available, you should obtain professional advice from a qualified tax advisor before acting on any of the information in this article.
A. Craig Elder, CFP, FCSI, CLU, CHS is branch manager with RBC Wealth Management Dominion Securities Inc. in Medicine Hat. Advisors are insurance licensed under RBC Wealth Management Financial Services Inc., a subsidiary of RBC Dominion Securities and is part of the RBC Financial Group, member CIPF. For more information on this and other financial strategies contact an advisor 403-504-2700.
