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Retirement and RRSPs

What to do with your pension if you quit your job early Add to ...

Should you stay or should you go? And if you go, should your pension come with you?

If you’re planning to leave your job before reaching retirement age, there are several things you need to consider to make the most out of your company pension.

First, find out is what type of pension you have.

If it’s a defined contribution plan, where both you and your employer contribute but you have a say in investment decisions, you may be more comfortable pulling the money out in a lump sum and choosing how to invest it, since you’ve likely been making investment decisions already.

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If you’re used to a defined benefit plan, where you both contribute but the employer is responsible for the investments and you expect a set payment, you may not be willing to take the risk.

“You don’t just get the money in a lump sum, it has to be used to fund your retirement,” said Perry Quinton of the Investor Education Fund. “On the defined benefit side, that’s a big deal because you’re now going to be making the investment decisions.”

If you plan to continue working, another option is to transfer the value into another pension plan, which would allow you to consolidate and not lose the benefits that come with being in a pension plan long term.

A defined contribution plan can also be transferred to an insurance company in the form of a deferred annuity, which would provide an income for life.

There are several individual considerations that come into play, Quinton says, including age, lifestyle and benefit expectations after retirement.

This requires taking stock of personal debt levels, including mortgage payments that could continue into retirement, as well as whether you plan to continue working on a part-time basis.

The health of the pension plan itself should also be taken into account, especially given how many companies have faced pension solvency issues over the past few years.

“If there’s a likelihood that the company itself might declare bankruptcy, transferring your money out now might be a better option,” said Dave Ablett, director of tax and estate planning at Investors Group.

Moving the money may also help your family after you die. Under most plans, the surviving spouse will receive a survivor benefit when the plan member dies, but the payments stop with the death of the surviving spouse.

If the money is transferred into a life income fund, there will likely still be money leftover to be paid into the estate, even upon the death of the surviving spouse, Ablett said.

On the other hand, in some plans, transferring the money out may mean you forfeit your right to the company’s benefit program.

At the end of the day, your evaluation needs to include not just your pension plan but also other forms of income, such as Old Age Security, Canada Pension Plan and personal savings, to determine how your reliance on the funds you’ll get from your company pension.

But whatever you do, says Quinton, the earlier you start thinking about it, the better.

“A pension is only one option. It’s a great option to have, not everybody does,” Quinton said.

“But even if you have a pension, the more you save for retirement, the more options you’ll have when you get there.”

 

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