Pensions

Pensions

Many people have a pension through their place of employment. Most people do not fully understand how their pension works, or what sort of income to expect from it when they retire, or what happens to their pension if they change jobs before retirement. You probably have questions about your pension. Has your employer, Service Canada, or the Canada Revenue Agency (CRA) been able to give you the answers that you’re looking for? Realistically, an experienced financial planner will be your best resource for practical information.

Planning to change jobs in the near future? What happens with your current pension?

Some employers will offer to permit you to “park” your pension with them when you leave, even if you don’t wish to draw an income from it right away. Some employers will insist that you make arrangements to move your pension to an investment company or a bank. Most employers will give you the option to do what you choose, but they all tend to encourage you to leave your pension with the company of their choice.

Depending on your employer, some pensions are “compatible” with each other and can be moved from one company to another without you needing to make any investment decisions. This is typically the easiest solution, but it isn’t necessarily the best decision for you. I can assure you that any advice given to you by your employer is in the best interest of your employer – which may not necessarily be in your best interest.

There are many types of pensions, and some types are better suited to being moved than others.

Which is your best option? Schedule a 15-minute no-cost preliminary consultation with me. Give me 15 minutes and I’ll give you answers.

Defined Benefit Pension changes are coming later this year. What will this mean to you?

Defined Benefit Pension changes are coming later this year. Will this impact your pension? Would it make sense to retire before the changes come into effect?

The Actuarial Standards Board of Canada (www.asb-cna.ca) determines the commuted values of DB pensions. They are implementing changes to the valuation formula to reflect lower interest rates, an aging population, and market instability.

What will this mean to you?

No two pension plans are the same, and many companies have more than one pension plan. Some will be impacted more than others, but they will all be impacted. Get your most recent pension statement and book a no-obligation, no-cost initial consultation with me, and I’ll help you understand your options.

What’s the difference between a Defined Benefit Pension and a Contributory Pension?

A Defined Benefit Pension determines your retirement income with a formula. Years service times a factor number times your best 3 years of income would be an example. Some employers ask their employees to contribute to their Defined Benefit Pension, and some do not. This type of pension is becoming less and less common, especially in the private sector.

A Contributory Pension has contributions from both the employer and the employee. The ratio of contributions changes from company to company. There is no guaranteed value for this type of function. The value of a Contributory Pension is determined by simply adding up all the contributions that have been made and adding (or possibly subtracting) the “gains” or “interest” that the funds have earned over the years.

This type of pension is much safer for the employer because they do not have to guarantee a specific income at retirement. It is just worth what it is worth. This does make things somewhat less than ideal for the employee as these types of pensions do not usually grow nearly as quickly as a Defined Benefit Pension.

Is your employer under-funding your pension plan? Should you be concerned?

In a word, “yes”, you should be concerned. It is certainly never a good thing when your employer has not set aside enough funds to cover their commitments to their employees.

Over the past several decades, there have been many companies in Canada that have defaulted on their pension commitments, leaving their retirees in a desperate situation that they were not expecting.

The Province of Ontario, as well as the federal government, do permit pension under-funding for companies that are struggling to honour their pension commitments, with the hope that these companies will eventually be able to restore the pension fund to where it should be. There is a significant risk these companies will ultimately close, or go bankrupt, leaving their employees with less pension than expected, or possibly no pension at all.

It is advisable that anyone retiring from a company with an under-funded pension plan, or a company whose economic future is questionable, to commute their pension instead of leaving it with the company and/or their pension company of choice.

What does it mean to “Commute my Pension”?

“Commuting a Pension” means transferring the entire value of the pension to the financial institution of your choice. This removes all financial obligations from your previous employer and ensures that you will be in control of when and how you access your hard-earned pension.

This is particularly useful when you are leaving one company and are not planning to fully retire, or if you do not have a spouse and would rather decide for yourself who would get the balance of your pension if you were to pass away earlier than expected.

How do you commute your pension? Book a 15-minute meeting with me, and I’ll get you started.

Should you take your pension’s monthly payment option, or is the lump sum a better choice?

There are many different types of pensions that offer many different types of options. You will want to consider all the options that your pension plan offers before making this decision.

Some pensions offer extended personal health plans – but only if you leave your pension with your employer’s pension company of choice. Depending on how important a personal, or family, health plan is to you, how well the coverage meets your needs, and how long the coverage will last, this may tip the scales toward leaving your pension with your employer.

But personal and family health plans are available even for those who decide to take the “lump sum”, or “Commute” their pension. If your employer’s pension company is paying a low interest rate, or rate of return, on your pension, you may still be further ahead to commute your pension, in order to get a higher monthly income and substantially greater flexibility.

A side-by-side comparison of your options will help you make this choice. Book a 15-minute meeting with me, and we can go over your options.

If I have a pension at work, can I still contribute to an RRSP plan on my own?

Absolutely. There are limits to how much you can contribute to an RRSP, and this limitation may be substantially reduced by certain types of pensions. The Notice of Assessment that you received back from the CRA after filing your last tax return will tell you how much RRSP contribution room you have available.

How do you start your own RRSP plan? Book a 15-minute meeting with me, and I’ll get you started.

Planning to retire within the next 5 years? Will your retirement plan be ready for you?

Five years is enough time to make a meaningful improvement in your retirement income. If you are ready to get serious about it, book a 15-minute meeting with me and I’ll show you how to make some significant improvements to your retirement income.

Should you start your CPP now or wait until you fully retire?

A Canadian citizen is eligible to begin their Canada Pension Plan (CPP) income as early as age 60. The federal government encourages you to delay starting your CPP by offering you an increased monthly payment for every month that you wait.

Is this increased monthly payment the government is offering worth the delayed start? This will depend on your planned employment status, marital status, anticipated life expectancy, and available RRSP tax-shelter room, among other things.

The primary concern with starting your CPP when you are still working full time is that you will be in a much higher tax bracket than you would be at retirement. This means that, in addition to receiving a lower CPP payment, you are also giving far more of the CPP payment back to the government in the form of income tax.

Taking less CPP income now – and also paying more income tax now – isn’t the best option for most people, but for some people, it does make financial sense to start their CPP early. When exactly? This is usually a complex calculation that requires a thorough analysis of your financial situation to give you a clear answer. This is part of my Retirement Tax Optimization plan (RTO plan) that I use with my retiree clients.

Book a 15-minute meeting with me, and I can help you get started with this important choice.

You and your spouse are thinking of retiring soon. Should you retire at the same time, or space it out a few years?

This is one of my favourite retirement strategies. There are many, many variables to take into consideration in this type of scenario, including the pension options available, age difference, health situations, job satisfaction, and even hobbies.

Book a no-obligation, no-cost initial consultation with me, and together we can dig through the available options and come up with your ideal plan. This is not a 15-minute conversation.

What is the best age to retire?

There are far too many variables to give a meaningful opinion on this sort of question. Pension options, retirement savings, past CPP contributions, life expectancy, health situation, job satisfaction, hobbies, and other interests are just a few.

Book a no-obligation, no-cost initial consultation with me, and together we can determine your ideal retirement date.

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