Termination of employment: What do I do with my pension?

25 May 2023 by National Bank
Employee verifying their pension plan online

For all sorts of reasons, many people will experience termination of employment during their career. You may have already experienced it yourself. When it happens, you’ll have two options for your retirement plan (your pension funds). You can buy a life annuity or transfer the value. To help you make the right choice, here’s what you need to know.

What’s the difference between purchasing an annuity with my pension or transferring its value?

What happens if I choose an annuity after my employment termination?

You have two choices. The first is to opt for a life annuity. That means that when you retire, you’ll receive a predetermined amount on a regular basis (usually monthly). This amount will never be reduced, and you’ll receive it your entire life.

What if I choose the transfer value option after my employment termination?

The other option is to transfer the value. That means you’ll receive the amount accumulated in your pension after your employment is terminated. You won’t be able to touch that amount before you retire (barring any exceptional situations). Until such time, the amounts will be transferred into what’s known as a locked-in RRSP or a locked-in retirement account (LIRA). Depending on the rules in effect when you retire, you’ll be able to use the amount that’s accumulated in your locked-in account to make payments to yourself.

How do I calculate the value I’ll be receiving?

There’s a complex formula that will be calculated based on the date your employment was terminated. Whether you choose an annuity or the transfer value, the vested benefits are calculated based on the following aspects and assumptions:

  • Your estimated lifespan (based on demographic data, not your health status)
  • An interest rate assumption
  • Projected survivor benefits
  • Indexing (if applicable)

Good to know

You may find that a transfer is your only option. This is usually the case if you have less than $15,000 in your pension fund. This is because the administrative costs are perceived to be too high in relation to the minimum monthly pension you would receive at retirement.

What 6 questions should I ask myself to help me decide between an annuity and the transfer value for my pension?

1. Which option will result in less tax payable?

You can split up to 50% of the annuity with your spouse. Please note that you must be 65 years of age in some cases. Depending on your situation, it could save you tax. Another plus: Because annuity payments are spread over time, you’ll avoid having to pay a high tax bill in a single year.

If you choose the transfer value, the amount is deposited to your LIRA or locked-in RRSP. It’s important to be aware that there’s a maximum amount you’re allowed to transfer. You could wind up with a surplus amount, which you could put into your RRSP or into a tax-free account such as the FHSA if you have unused contribution room. Otherwise, you may have to pay income tax on it.

In some cases, the transfer value could optimizes your government benefits such as the Guaranteed Income Supplement because it lets you adjust your withdrawals based on your other sources of income. Because the right choice varies from person to person, speak with your advisor.

2. What proportion of my total income will the annuity represent?

Take a look at your financial plan for retirement. (It’s a little like a roadmap to your goals.) It will help you determine how much the annuity will contribute to your total income.

When the annuity represents a large proportion of your income, you may want to choose this option to have financial stability. It’s a foundation that will never change.

Conversely, if it represents a small portion, choosing the transfer value will have less of an overall impact on your assets. By choosing this option, you’ll be able to increase or decrease the amount you withdraw each year, and you can use that amount to pay for special projects.

3. What’s my investor profile?

Do you know your investor profile? It can help you determine your risk tolerance.

If you’re cautious and value peace of mind, an annuity is a good option. Why? Because the amount won’t change, even if markets (e.g. stock markets) do.

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Can you handle risk and fluctuations? By taking the transfer value and investing it, you could benefit from higher returns. Be careful, though: nothing is guaranteed. When you choose this option, you’re betting that you’ll do better than the estimate used to calculate the annuity. On the whole, it means you think this will earn you more.

4. How long will I be retired?

This may seem like a strange question, but you have to factor in what’s referred to as survival risk. In other words, if you’re in good health and think you’ll live long, an annuity could be the better choice. Why? Because it will be paid to you for life. It will never run out.

On the other hand, people who have health issues and a shorter life expectancy may want to choose the transfer value. That’s because it could ultimately mean more money for them. 

5. Do I prefer flexibility or stability?

An annuity can end up being a good option if you value stability (or if you like to spend). Because in these types of cases, the amount will always be the same, and you won’t have to worry about investments and withdrawals.

The transfer value however is more flexible. That can be handy if you’re planning major projects (e.g. travel, home improvements). You’ll still have to comply with minimum and maximum withdrawals, but you’ll be able to make any necessary adjustments within those limits. You’ll basically be able to withdraw a little more or a little less depending on your needs.

6. Are there other advantages to choosing an annuity?

In some cases, opting for an annuity can give you insurance coverage or discounts on certain products and services. It could be worth checking these advantages with your plan administrators and considering it.

There’s no one solution that fits all. When the time comes to choose between an annuity and the transfer value for your pension, turn to retirement specialists. They’ll help you understand all the questions you need to ask and make the right decision for your needs and goals.

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