Seems to me that there is a lot of movement afoot these days, at least amongst my clients who are in their 30's & 40's.
Their hard work & commitment to their jobs along with being exceptional at what they do has resulted in new job opportunities that bring with them exciting new challenges and in need of assistance regarding a number of things including; "What should I do with my pension?"
In the case of a defined benefit pension plan, when you are entitled to both your contributions & your employers’, upon giving your notice, you are sent a bunch of paperwork & are presented with your options - choose one & send us the signed paperwork you receive from your pension administrator so we’re able to help you make your decision and then you can send it back to your pension administrator.
Here are the Top 5 Factors I ask my clients to consider before making a decision, which is part of my wanting them to make an informed decision along with these factors elicited, that helps me assist in their decision making process.
I would like to emphasize that each one of these factors & your response to them, are determining factors in this decision making process so that, what you read below is in no way intended to be advice on what you should do. Only your Financial Planner/Advisor knows your situation and no one answer fits for everyone, it's a decision that needs to be made based on your wants/needs and individual circumstances.
Five Factors to Consider:
1. Market Risk - are you willing to assume that?
When you take the commuted value of your pension - ie. the dollar value assigned to your pension based on generating future income for you, if you roll this out into a LIRA you are taking all of the market risk vs having a guaranteed income provided for you, an income that is also geared to inflation.
2. Calculating the guaranteed income based on the capital amount to the potential income you could generate based on certain assumptions, if you take the commuted value of the pension.
For example, if you are 37 years old, have a commuted value of your pension of $100,000 & the guaranteed income is $1,400/m , how does that compare to generating your own income if we assume a 5% rate of return over the next 27 years (to age 65) & assuming a 5% draw on that capital when you retire. In 2042 the capital could grow to $373,345 & that could generate an income of $1,555/m, again assuming a 5% ROI. Some years you could make more, some years less, there are no guarantees.
3. Will you have a pension plan in your new job? If yes, is it a Defined Benefit Pension Plan, as well?
The ability to start into another pension plan, especially if it is a defined benefit one (these types of pensions are as good as gold in my books!) will therefore provide another source of guaranteed income in retirement, along with your Old Age Security (OAS) & Canada Pension Plan (CPP). That could provide some incentive to roll the commuted value of the current pension out into a LIRA, or for some people, having both pensions, in place, is what they need to feel safe & secure in their retirement planning.
4. How do you feel about this capital becoming a family asset with no reduction for the survivor benefit?
Within many pension plans, the survivor benefit amount is 60% (i.e. a 40% reduction would take place should the pensioner predecease their spouse) of the pension amount. In other words, if your income was $1,500/m & you died, your spouse would receive $900/m. If your spouse also has a pension, this may not be a concern however in some situations this is a concern.
Thus by taking the commuted value of a pension the money becomes a "family asset". I have one client who, although in her circumstance, I advised her not to take the commuted value of her pension, she wanted to roll it into a LIRA so she could potentially leave something for her daughters.
5. Viability & Sustainability of your Pension Plan.
We don't expect our government to default on fulfilling their obligation to pay their employees their pensions when they retire.
Having said that, I have to give a lot of credit to a client I met with recently who announced the moment I started to discuss his options with; "I want this out, while I can get it out because I know this plan is underfunded & I am concerned I'll have nothing if I wait!"
His decision was made prior to my discussing the other 4 factors above. He humoured me by listening to the pros of cons of making this decision & I can appreciate his position.
A lot of other pension plans through the hospitals, universities, colleges & the government, are in the process of making sure their pension plans are viable, including CPP & OAS. That's why many of us will have to wait longer to start collecting OAS for example, to age 67 & we will receive enhanced benefits if we wait to start some of our government pensions earlier.
In closing, I would like to reiterate that this decision is a big one & needs to be weighed carefully based on your situation, risk tolerance level & need for some guarantees in your life. I like to think that planning for your retirement should be a pleasant experience and the retiring itself, a cause for celebration.