Compare Your Options

Once you understand the available options, the next step is to determine the option that is right for you.

Defined Benefit Plans

Remember, the options available include: (1) an immediate pension or (2), a deferred pension in the form of a monthly income at retirement or, (3) the commuted value of your pension benefits.

Immediate Pension -- if you qualify for an immediate pension (usually within 10 years of your normal retirement date), you could start receiving these early retirement pension benefits when you leave your employer. The amount of the pension will be less than if you wait until your normal retirement date, since the pension plan will be required to make pension payments to you from an earlier date and, presumably, for a longer period of time. The reduction in your pension income is usually determined by the number of months prior to your normal retirement date.

Deferred Pension -- the major advantage of this option is that you know today exactly what your monthly pension income will be upon retirement. The pension plan must pay you this guaranteed income stream. The monthly amount you will receive is quoted in today's dollars and may not be adjusted for inflation in future. As a result, even though the monthly amount may appear significant in today's dollars, inflation may substantially reduce the purchasing power of this income stream.

Commuted Value -- this lump sum payment from the pension plan may be used to, (1) purchase an annuity or, (2) be transferred to another employer's plan, if allowed, or, (3) be transferred to a locked-in RRSP. To find out whether you can transfer the commuted value to your new employer's pension plan, ask the pension plan administrator at your new employer. If the transfer is allowed, you should determine the type of plan offered -- defined benefit or defined contribution -- and the rules governing the plan and investment selections available under such a plan.

The option of transferring the commuted value to an RRSP provides you with the most flexibility and gives you control over the money. It also places on you the responsibility of investing the money. In addition, the Pension Adjustment Reversal (PAR) retroactively restores lost RRSP contribution room to defined benefit plan members who leave the company before retirement.

The choice between taking a pension or commuted value is very important and depends on a number of assumptions about future events. The question you must answer is whether you can provide a larger income stream by investing the lump sum. Often times the more relevant question is, could you sleep at night if you decide to take this option?

Defined Benefit Plan Options

Immediate or Deferred Pension Options

Commuted Value Option

Option

Receive an immediate pension, (early retirement), if you qualify, or a deferred pension at your normal retirement date

Take the commuted value and roll the lump sum, tax-free, into a locked-in plan

Retirement Income

Employer provides guaranteed lifetime income according to a formula

Income will depend on the value of the assets and investment returns

Advantages

  • Amount of retirement income is known in advance
  • Possible early retirement benefits (pension reduced depending on how early benefits are taken)
  • Percentage of pension paid to surviving spouse
  • You control management of the funds
  • Tax-free compounding within a locked-in plan
  • Commencement of monthly income may be early (Age 55) or delayed (Age 65)

Disadvantages

  • Possibly no inflation protection on benefits
  • Pension income may be small if years with employer are few
  • Investment risk is with the employee
  • Other employer-sponsored benefits may be forfeited by opting out of the plan

 

When evaluating the commuted value option, consider the following:

  • What investment options would you consider?
  • What is a realistic rate of return expectation?
  • What monthly income would the future value of the lump sum produce on retirement?
  • How does the monthly income from investing the lump sum compare to the monthly income under the pension options?

The answers to these questions can be difficult and you may want to seek professional advice to accurately compare the options. Keep in mind though that since investment risk is transferred to you, there is the possibility of either a larger or smaller retirement income.

Defined Contribution Plans

If you are a member of a defined contribution plan, the options available to you are generally simpler to assess and are as follows:

Roll over your money into a new employer's plan: Not all employer plans accept rollovers, so be sure to talk to your new employer's benefits specialist before making your decision.

Keep your money in your current plan: You will need to talk to your current employer benefits specialist to see if your plan allows this option. If so, you would keep your account with your pension or Group RRSP assets invested in the investment options available.

As you evaluate these choices, keep two questions in mind: Will the investments offered in an employer plan meet your needs in the future? And will the plan allow you flexibility to access your money?

Transfer to an RRSP: You may have the option of rolling the value of your pension account directly into an RRSP. In most cases, funds originating from a pension plan will be locked-in until retirement. Group RRSP and DPSP funds can be transferred to a regular RRSP.

The investment options available to you include all RRSP-eligible investments, in which case, you may have more flexibility than an employer-sponsored plan.