Article written by Robert Rusak, Wealth advisor with Assiniboine Credit Union and Credential Asset Management Inc.
You’ve worked hard over the past number of years. You’ve paid into the company pension and there’s some real value there waiting for you. And if you’re lucky enough, your pension is a defined benefits plan. But what if you decide to change employers? Now you’re faced with some serious questions about what to do.
In the past, when an employee changed jobs or retired, there was a good chance they would continue in the defined benefit pension plan. Nowadays many pensions are being discontinued or may not be fully funded, as the cost to the employer has increased dramatically, so some employees who move on are choosing to move their pension funds. At ACU we look at the pros and cons to each scenario to help you find what’s best for your situation, as no one choice will fit everyone. The best decision for you will be based on the plan’s benefits, your individual circumstances and other factors. Defined Benefit Plan vs. Life Income Fund
The defined benefit plan promises to pay you a pre-determined monthly pension benefit until you die. When that happens, your spouse receives the pension until they pass away. The pension payment is a fully taxable benefit and qualifies for the pension credit. The monthly benefit is usually determined by the number of years of service, average annual salary, as well as various assumptions based on lifespan, retirement age, inflation and anticipated investment returns.
The pros and cons are:
Locked-in Retirement Account (LIRA)
A LIRA is similar to an RRSP except you cannot contribute or withdraw from the plan. The account is a holding vehicle that allows the funds to grow in a tax sheltered environment until an annual income is wanted or required. The funds can remain in the plan until December 31st of the year in which you turn 71.
Life Income Fund (LIF)
Similar to a Registered Retirement Income Fund (RRIF) the plan is used to provide an annual income. The funds come from locked-in money, you cannot add to the account and the LIF has a minimum you have to take from the plan similar to the RRIF. The LIF also features a maximum you can withdraw annually from the account meaning you can vary your income anywhere from the minimum to the maximum payment. The percentages you can take are pre-determined based on your age and value of the account. If for some reason you no longer needed an income these funds can transfer back to the locked-in retirement account up until the age of 71. Payments from a LIF do not qualify for the pension tax credit until the age of 65.
Deciding to move or take the monthly pension payment is a big decision and has a significant impact on your retirement. As you can see there are many factors to consider when determining what’s best for you. If you have recently left or are thinking of leaving you current employer and are going to be faced with this decision, please talk an ACU wealth adviser. They can help show you what’s best and ensure your future financial need are secure.
Wealth Adviser, Credential Asset Management Inc.
Assiniboine Financial Group
200-900 Harrow Street East
Mutual funds are offered through Credential Asset Management Inc. The information contained in this report was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This report is provided as a general source of information and should not be considered personal advice. Please speak to your personal financial representative before making any investment planning decision or implementing any strategy.