51. What happens to your pension when you leave your job?
What happens to your pension when you leave your job?
EPISODE SUMMARY
Whether you find a new job, retire or are laid off, if you have a pension or savings plan at work, you'll have to make some decisions about what to do with it.
You have to know what type of plan you have, what options are available for that plan and then what makes sense for you based on your financial goals and timeline.
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Transcript:
Evan Neufeld: Hello, and welcome back to the Canadian Money Roadmap podcast. I'm your host, Evan Neufeld. Today, Jordan is back with me and we are going to discuss pensions and employer sponsored retirement savings plans. What happens to these things if you leave your job, if you retire or you quit? Okay, Jordan, welcome back to the podcast. And we got another sunshine day here, folks. This is a good time to be in Saskatoon. isn't it?
Jordan Arndt: Absolutely. It's nice. The summer is finally here.
Evan Neufeld: Thanks again for joining us today, if this is the first time you're listening, click on that follow button. If you're listening on apple podcast or Spotify. You used to say subscribe, I think, but now everything's talking about following. Follow along and you'll be able to hear a new episode from us every couple of weeks about topics just like this.
But today we're talking about what happens to your savings plans at work specifically your pensions if you leave. And this is pretty relevant these days. You might have heard or seen headlines about something called the great resignation. Everybody's hiring because COVID 19 has kind of thrown a monkey wrench into a lot of parts of the employment market. And so the average employee actually has a little bit more power. And so there's been a lot more shifting around of jobs. So if you quit, if you get laid off, unfortunately if you're fired, but if you even retire early, you might have a pension at your previous place of work, an RRSP matching program, a deferred profit sharing plan, all these things. What happens to you and those plans when you leave. So this podcast is going to highlight what are those different programs and what can you do with those options? Jordan, let's take it away here. What kind of pensions are there?
Jordan Arndt: Yeah, this is a good place to start. So before we even get into discussing what can you do with it if you leave, quit, or retire. We need to know what kind of pension you even have. So there's a bunch of different options, but there's kind of four main ones we're going to touch on here. So first one being RRSP matching. So that might be you contribute 3%, your employer might match up to 3% as well. That number's going to vary depending, but that's just a typical registered retirement savings plan that you might have.
Evan Neufeld: Let's just confirm again, an RRSP matching isn't a pension. It's not a pension, but people often think of it as the same way.
Jordan Arndt: Yeah, it's not going to be constrained by pension legislation like some of the plans that we're going to talk about here. But it is a common plan that you might see via a workplace or employer sponsored program.
Evan Neufeld: So you put in 3%, your RRSP comes right off your paycheck. You don't pay tax on it because an RRSP comes right off the top. If you go back and listen to our perfect RRSP strategy, this is one of those times where it actually does work pretty well, regardless of your income bracket, because you don't have to have the discipline to invest a refund because usually there's no refund because if they're taking it right off the top of your check, so that's great. Now when most people think of a pension, that means a guaranteed payment for the rest of your life. Talk about that one a little bit.
Jordan Arndt: So we got something called the Defined Benefit pension plan DB, for short that you might hear. That's kind of exactly how it sounds so defined benefit. The benefit is clear, it's known, it’s guaranteed and it's calculated based on the details of the plan. Every plan's going to vary slightly with how it's calculated, what factors go into calculating the benefit and all that sort of thing. But the point is the benefit that you'll receive once you are eligible, is known and guaranteed for life.
Evan Neufeld: One of the most common ways to calculate a DB pension will be a multiple of certain years of income. Sometimes it's your last five. Sometimes it's your whole career, but it'll be a factor of how much you earned because you are contributing to it over time. So it’s then a factor of how much you've kind of contributed to the plan.
So it's some sort of multiple based on an average earnings throughout your time with the employer, plus your age and years that you worked there. And so if your age, plus the number of years worked, reaches the magic number, then you qualify to receive the full benefit from your pension. Many cases, it's something called like the rule of 80 or the rule of 82 something in the ballpark of those numbers.
So that means if you're at a rule of 80 and you are 55 and you worked for 25 years, there you go. I think I did the math right there didn't I. Yes, it's early here. So in that case, this person would qualify for early retirement benefits starting at age 55. We don't need to go into the specifics there, but that's just kind of how pensions are typically calculated. What's the other one, the one that's much more common these days.
Jordan Arndt: Yeah. DB's were more common and over time they've just become less and less common.
Evan Neufeld: Because their expensive, interest rates are lower and it's tougher to make money for.
Jordan Arndt: And the employer's taking on all the risks. Investment performance doesn't matter in the DB. You know what your benefit is and you get it, no matter what. What's becoming more common as plans have transitioned to this and there's some large employers here in Saskatchewan that are switching to this program right now, it it's called a DCPP or a defined contribution pension plan, DC for short. In this case it's a little bit different as the contributions are specified both from you and your employer. But what's different is the amount that you will receive upon retirement is not guaranteed. And so instead investment performance absolutely does matter. So you can kind of think of it as you're working, you're contributing, it's growing the pile bigger and bigger. What you have available for you upon retirement depends on how it's invested, how well those investments performed and how much you've contributed. And so when we compare that to the DB, where the DB the investments doesn't matter. What you're going to receive is known and guaranteed. With the DC, what you contribute is known and guaranteed, but what you receive on the back end is unknown until you get there.
Evan Neufeld: Yeah. Highly variable based on what investment selection you pick. So if you're a conservative investor, which is just fine, you have to actually pick the investments yourself or with the plan sponsor. There, sometimes there's an advisor associated with that. They can help you out with that. But you could be also a little bit more aggressive and hopefully make a little bit more return over the lifetime of your DC pension. So yeah, at the end of the day, your defined contribution pension plan, isn't that much different than RRSP matching. So typically what happens is you'll contribute some and your employer contributes some. Now you've got your pool of money and you've got to make it work. The way that it's different is that it is under pension legislation. Which means that there are specific rules because the idea or the government's idea of a pension at the very least is that this should be money for life. And so even though you carry all the risk and there's an investment risk associated with it, there are typically quite specific rules on how you can turn that into income later. And the government has to make sure that stays under pension legislation, unlike your RRSP, which is a bit more flexible in many cases. Last one, maybe let's talk just very high level here a deferred profit sharing plan.
Jordan Arndt: Yeah, you may see that once in a while, it’s maybe not quite as common. That's going to be from the profits only the employer contributes to this plan in particular. If you have it, it probably has a vesting period on the dollars that are contributed to it. So if dollars are contributed today, there might be a two year vesting period, meaning they're not actually yours until two years expired or passes. You may see it in conjunction with an RRSP plan. So perhaps if you've got a workplace program set up, you contribute to the RRSP but your matching component or whatever the employer decides to contribute goes into a DPSP that deferred profit sharing plan. Again, maybe we don't need to get into the too many nuances, but just know that it does exist and perhaps you have one.
Evan Neufeld: Little piece of advice maybe we'll put in here is that if you have the capacity to contribute more and your employer can match it. Try to take advantage of that. It’s typically a pretty good deal, free money is the best money. So if your employer will match up to 6%, really take a hard look at your cash flow every month to see if you can take advantage of that, because if you can get that money from them, that is probably almost the universal piece of advice here. That if you can afford to take full advantage of the match, do it. Jordan, you quit your job. I hope not actually here, you hypothetically quit. I'm not going to pretend that I'm firing you. You're retiring, let's do that one. Jordan you're retiring early. Now, what can you do with these plans?
Jordan Arndt: So the options that you have are going to kind of overlap here, between a couple of them and they're going to differ as well depending on what type of plan you have. So kind of at a high level, once you resign or retire, you should receive a letter from the pension administrator outlining your options. So that typically should come within a few weeks, three months maybe kind of max, it might depend. But anyways, once you receive that letter, it's going to outline here's your options, what you can do with your money now that you are no longer employed with us. You'll have a certain amount of time to make that decision. Otherwise, there'll be a default option that's chosen. It's not secret. The default option will be noted. You'll know what it is, but basically you have a certain amount of time to act otherwise the default goes into place.
Evan Neufeld: It won't be permanent. The default option isn't permanent, but there's just a period of time before they say, okay, they need to do something with it.
Jordan Arndt: But even after that, there's still options. So let's say you've got the defined benefit pension plan. There's a few options available to you.
Evan Neufeld: Let's assume you're leaving early because if you retire, you're just going to get that payment for life.
Jordan Arndt: Yeah, absolutely. That's a good point. Not all these options, I think it's worth noting, will be available to you. It's reading your pension booklet or having your advisor read it or somebody look into it just because every plan is different high level though. Option number one, you can leave it. You don't need to do anything with it. You'll leave it within the plan. And then once you become eligible, typically at age 65, then you can start to receive that benefit that's defined based on the calculation that's there.
Evan Neufeld: And in that case, because you left early, before you qualified for say your rule of 80, your rule of 82, your rule of 78, whatever the case is, you would receive a smaller benefit than if you would've stayed there and hit that rule. And you also can't earlier than 65 in most cases anyways, earlier than 65. So sometimes it's called a deferred benefit and you can probably see that on your pension statement. It's like, this is how much you'd qualify if you left it today and then start taking it again at 65. So that's an option where you can just leave it there and hope you remember it at age 65.
Jordan Arndt: Option two. So second option you can possibly transfer. It's called a lump sum commuted value. So typically when we're talking about a DB, that's a monthly benefit that you receive. Instead, you can transfer some, a commuted value to a locked in retirement account, which basically again under pension legislation, it's locked in and you can't access it until a certain period of time. So that commuted value will be defined for you on your letter. You'll know what that value would be. You are taking on the risk now So if you leave it, they're still managing it and they're responsible for it. If you take on that commuted value, now you have to decide entirely what do I want to do with this money? Do we want to invest it, how do we want to invest it? What does that look like? How do we want to take income out at a certain point when all those decisions become your decisions to make, but it is an option that you can transfer it out of the plan.
Evan Neufeld: And when we talk about commuting it, that means just moving it. But when you think of a DB pension, that is a stream of income in the future. And so what they do is they calculate how much money do you need upfront to equate to that future stream of income. This gets a little bit complicated and this calculation changes over time based on a number of factors internal to that pension. So we can't blanket say yes, you should always transfer it, or yes, you should always leave it. That number and that assessment will change over time. So if you do have the option to commute it, have a look at it. As Jordan said, yeah, it'll go something called a LIRA after that, locked in retirement account. And there are specific rules with that. You can't withdraw from a Lira, you can't contribute to it. Once it's in there, it's there. And then once you want to start taking money out, then it turns into something called a LIF or here in Saskatchewan and I think in Manitoba very recently now, something called a prescribed RRIF. Oh boy, this is another podcast entirely, but there are very specific withdrawal rules that are applicable to this. Just like I said at the beginning, they tried to make sure that money still acts like a pension. So in most provinces, besides us here in Saskatchewan, there is a minimum that you have to start taking out at a certain age, but also a maximum. So I refer to a LIRA like a bucket, but a bucket with a hole in it and a lid on the top. So you have to start taking some money out. That's the hole in the bottom, but you can't take out as much as you want, there's a lid on the top of it. So maybe that's not helpful. But anyways, that's something to keep in mind when it comes to a deferred benefit pension. What if your new employer also has a DB pension? Yeah.
Jordan Arndt: There might be an option to transfer it to the new plan. Again, check out your details, but you may be able to lump in your old DB with the new plan and keep it going, for lack of a better word.
Evan Neufeld: Yeah. That can be a little bit complicated because the calculation rules are going to be different at both pensions for sure. So if that's something that you really want to do, anticipate a lot of headache and administrative work, but it'll be fine. It's an option still. If they allow for that, then you can pursue that one. Last one is that you can buy an annuity. So essentially you can buy your own pension. An annuity is just something where you exchange dollars today for a stream of income in the future. So that's something that you can consider as well. Okay. Let's jump ahead to a defined contribution pension plan because there's no specific stream of income starting at any specific age, what are the options here?
Jordan Arndt: Not a lot different, to be honest. Option one again, you can leave it. They will happily still manage your money or be responsible for that. You have to provide the direction on how you want it managed to be clear. Option two, you can transfer it out, just like with the DB. You can transfer it out to a LIRA, a locked in retirement account. The value is a little bit easier to calculate in that, or you'll know what the value that you can transfer. Third option again, you can transfer it to another employer pension plan, depending on your new employer and what that looks like. You can also buy an annuity. It's a lump sum amount that you could turn into creating income.
Again, that would be an interesting case where you're taking a DC and kind of turning it into a DB based on…
Evan Neufeld: You don't see it very often, especially because interest rates have been so low, but you might start to see it more now as GIC and bond rates are much higher due to higher interest rates.
Jordan Arndt: So largely the options aren't too different necessarily from a DB.
Evan Neufeld: Yeah. A few more knowns because with the DB pension if you try to move it out of there, you're kind of at the whims of that mysterious calculation. Whereas with the DC pension, it's been in this international equity fund and I know exactly that there's $247,000 in there. Perfect. If I move it out to a LIRA there's $247,000 there. So that one's pretty straightforward. Again, once you leave your position with the DC pension, actually if you retire at a typical age, the options don't really change there for you compared to when you leave early. So that one's a little bit more straightforward when you get your pension options when you leave. Now with an RRSP, it's a little bit different, again, a bit more simpler. Maybe we're going most complicated to simple here. This is nice flow. So with an RRSP, you can leave it with them, again most pension or RRSP group, like we call them group RRSPs. The providers are usually insurance companies, but here in Canada, most insurance companies are also massive investment fund providers as well. Think of Sunlife, Manulife, Canada life, who else? Industrial Alliance. Those would be the big ones I think. RBC also does a bunch of group business. So they would love to keep it for you. In many cases you would still be able to participate in the discount on the investment management fees. So depending on how it's invested anyways, in some cases it could be an affordable option, if that's something that’s really important to you. It might be marginal. It might actually be more expensive. So that's just something to keep in mind there. Or if you have an RRSP elsewhere, if you do it yourself, if you've got the bank or with an advisor, you could typically transfer it directly into your own existing RRSP. Pretty simple.
Jordan Arndt: Yeah. What's nice about that is if you've got a couple different RRSP accounts, then you can kind of combine them and, and make it a little bit more amalgamated. Again, that's not the answer necessarily, but it might add to some simplicity as opposed to having plans all over the place and values all over the place. And then when you do turn the tap onto income, then it's coming in from a variety of locations and it can just maybe add more headache than it's worth, depending
Evan Neufeld: Lots of what we see here in our office is that folks want to combine things as much as possible, at least have it all under one roof. For sure,that makes a ton of sense to me. And for some people if you're in a field; so if you're in health services, you're a teacher and you move from school divisions or things like that, where every different division would have a different pension or something like that. What you can do, if you have multiple pensions that you move throughout your career. Now remember things go into a LIRA, if you have lets say an Ontario LIRA, and now you have to get another Ontario LIRA, you can actually combine those. So I said at the beginning, you can't contribute to it again, but if you have multiple pensions to be transferred from the same jurisdiction, you can lump them together. So that can kind of simplify things a little bit too. We see that once in a while, for sure. Okay Deferred profit sharing plan.
Jordan Arndt: Again, you can transfer that to a personal RRSP account or one that you manage on your own. If it's vested the key thing there is take a look at the vesting period and make sure that the money has vested or you can take it in cash, that's also an option.
Evan Neufeld: Every one of these options, every dollar that you take out of them at some point is taxable, right? So the end result, there's no option where you can say, well, I've got this what used to be taxable source of income and turning into tax free? No, there's no great planning opportunities there. Every dollar that you take out of a DB, DC, LIRA, LIF, RRSP, you name it. Every dollar that comes out is taxable. So same thing with the DPSP maybe I should stop using these acronyms. That's why with a deferred profit sharing plan, you can transfer it to an RRSP because the rules are pretty similar. Okay, let's go back and talk about some of the other considerations specifically for defined benefit pension plans.
Jordan Arndt: Yeah, that one's interesting. Kind of like we've mentioned here a few times it's probably the most complicated or got the most going on of the options. And so you're going to want to examine your plan closely before making a decision. Take a look at the pension booklet, talk to the administrator if you need to, whatever you got to do. There's a few ancillary benefits that a DB might have that some of the options might not.
For example, you might have access to health or dental care benefits by being a plan holder. If you leave the plan, you're going to give that up. You might be entitled to something called a bridge benefit, which is an additional benefit that you would receive before 65 until OAS kicks in. If you leave the plan, you lose that bridge benefit as well. Potentially survivor benefit, so if you pass away, some of your benefit maybe passed on to your surviving spouse or partner. Inflation protection, that's a really interesting one especially today your planned benefits may be indexed fully or partially to whatever inflation is. Today inflation is running quite hot as we know, talk about this inflation protection is, is a big one. It doesn't mean it will have inflation protection. It just might.
Evan Neufeld: If you're looking on your pension statement, sometimes you'll see that listed as an acronym called COLA cost of living adjustment. So, if you're looking for something that says inflation, you probably won't find it. You'll probably see cost of living adjustments. So that's something you can look at in your pension documents.
Jordan Arndt: Just another acronym to throw in there.
Evan Neufeld: How many acronyms do we need today, Jordan? This is a good one.
Jordan Arndt: I think the last thing to consider and don't want to get too conspiracy theorist here necessarily, but what's the financial health of the company. The DB is being managed by the company. They are responsible for it. If for some reason you think the company's going underwater and 10 years from now, they're not going to be here. Down goes your pension with it, to some extent, maybe you want to take it out and manage it yourself and assume more of that risk. That's a tough one because who knows what 10 years looks like from now.
Evan Neufeld: There's a lot of analysis that gets done with a lot of the big US based companies that have been around forever that still have these DB pensions. So companies like General Electric, for example, they have a massive, massive pension liability with declining revenues and things like that.
So there are potential risks that called them old economy companies like that, but maybe not right. Things change pretty quickly. But one other thing that you could look at is the funding status of your pension too. So that doesn't mean that your company or your school district or your health authority or whatever is going to fail, but perhaps their calculation was a little aggressive for folks that are currently receiving payments from that pension. Versus the people that are contributing to it. So here in Saskatoon, one of the common things that has happened is they've adjusted the pension so that retired teachers right now, the vast majority of them are receiving an index pension. Whereas someone who is still working as a teacher, likely will not receive an index pension and they're contributing a little bit more just due to the health of that pension. So those kind of things change over time, too. Anyways, that's not prescriptive of whether you should leave it or take it out, but just other factors to consider there. One more consideration to make here and we talked about this briefly already, but your desire for flexibility over the investment management. Maybe your comfortability with investment risk, things like that. If you're someone who works with an advisor that, you know, like and trust and want to just keep things simple with them, Great. If you're a DIY investor who knows what you want to invest in and how to adjust your payments and whatnot over time, Great. If you're someone that's completely new to investing, you don't want to know it. You don't work with an advisor. Maybe transferring it out doesn't really start to make a ton of sense there.
Jordan Arndt: Yeah. It depends on your desire, the greater control that you have, the greater personal risk that you're assuming at least on the investment manage side of it. It also gives you flexibility over income. And you know, we talked about minimums and maximums with the locked in accounts, but you can control a little bit more how much you want to take when you want to take it, that sort of thing. DB, you're getting your monthly check or payment every month, annuity, similar thing less control but more guarantees. You need to decide, I guess, where you fall on that desire for managing it and having that control over it. No right answer there.
Evan Neufeld: Yeah, no right answer there. Kind of, along with that, just keep in mind that every province has different rules for LIRA's. And so if you do transfer things out in some provinces, I'm not even going to say which, because this might be outdated by the time you read it. But in some cases, if you convert your LIRA to a LIF prior to age 65, that province will let you unlock a certain portion of it over to an RRSP. So it's a lot more flexible. In other provinces, if you have some money locked in before 65 and you don't have other employment income, they'll let you unlock a certain percentage of it too. Tons of rules here in Saskatchewan, no maximum. So you can unlock and withdraw the whole thing. Again, you pay tax on every dollar, but the rules are all different. So when you're considering transferring it, maybe have a look at your province's rules for how that money will be treated after it has been withdrawing from your pension. Jordan, let's wrap it up here and give me a summary of some things that you want to consider. If you are leaving, if you quit, if you're laid off or if you're retiring here, what do we do with these retirement savings plans?
Jordan Arndt: So let's say the event has happened where you're moving on for whatever reason. Number one, identify what type of plan you have. That's an important place to start. And then number two, be on the lookout for that letter from the plan administrator. That's going to be your kind of guidebook at least to start with what are your options to take your plan and move it elsewhere or whatever you want. Via the letter and also looking at your plan booklet and some of the documentation, identify those options that are available to you and examine the possible considerations that need to be evaluated when making your decision. This is where you might want to bring in your professional advisors if you work with someone, you know, hopefully they'd be happy to help and walk you through just some of your options and help you decide and navigate those considerations. Lastly, then initiate your decision. Again, you know, there may be lots of paperwork with that follow through to make sure all the transfers take place. Sometimes things just take longer than they should.
Evan Neufeld: Sometimes they need, call it a wet signatures or an ink signature. Sometimes you need spousal approval to withdraw some of these things, lots of complicating factors,
Jordan Arndt: It's humans on the other end as well and so I think it's worth being diligent just to make sure that the transfers go through and everything ends up where you expect it to be.
Evan Neufeld: Perfect. Well, that's good. If you have a situation like this, or if you are considering using a pension plan, or if you are using a pension plan as part of your retirement income, and you're looking for a retirement income strategy, there's going to be a link in the show notes. If you are looking for help with a plan to help structure your retirement income, reach out, this is what we do. And if it's something that you're interested in, we'd love to chat with you and see if that's appropriate or if not, we can point you in the direction of some other resources. Awesome. Thanks so much for listening folks. And we'll see you in a couple weeks.
Thanks for listening to this episode of the Canadian Money Roadmap podcast. Any rates of return or investments discussed are historical or hypothetical and are intended to be used for educational purposes only. You should always consult with your financial, legal and tax advisors before making changes to your financial plan. Evan Neufeld is a Certified Financial Planner and Registered Investment Fund advisor. Mutual funds and ETFs are provided by Sterling Mutuals Inc.