For some, retirement is a welcome time to slow down, pursue other interests, or travel. For others, it's an unwelcome event, the result of a layoff later in life.
Forced retirement because of age may be largely a thing of the past, but when you're let go from a job because of downsizing or other factors as you're nearing the end of your career, it can feel like the same thing.
Whether it's a pension or a severance package or both, determining how to manage that money can be a daunting process. If ever there was a time to get professional advice, this is it.
"With a pension, a person has to make a decision [on how to take it], and that's the hardest thing," says Logan McLellan, senior associate investment adviser at MN Investments in Summerside.
"Most people don't even know what they're deciding. You don't want to just fill out the forms and throw them in the mail back to your employer."
A 2015 survey by Angus Reid Institute, which examined the "anatomy" of retirement, found that 48 per cent of respondents said they retired earlier than they intended to because of circumstances beyond their control. Twenty-seven per cent of them stated that making ends meet was a struggle.
The study also found that government pensions made up a significant source of retirement funding, with 57 per cent saying these pensions were among their main sources of income. That compared with 53 per cent who cited private pensions and 30 per cent who said registered retirement savings plans (RRSP).
According to a 2015 Investors Group study, two-thirds of premature retirements were related to personal or family health issues. It found that 40 per cent of working Canadians aged 45 to 64 would not be able to cover their cost of living beyond five years if they had to unexpectedly retire tomorrow.
When it comes to severance packages, experts say that people should always get professional advice – a lawyer, financial adviser or accountant.
"A person is theoretically under no obligation to accept the first offer they're made for severance," says Dave Ablett, director of tax and estate planning at Investors Group. Although there are general guidelines surrounding severance, such as an employee receiving one week's worth of pay for every year worked at a company, he says they don't necessarily always apply.
"I don't like to use those rules of thumb," Mr. Ablett says. "Let's say you were working for a company and had been there a long time then were recruited to join some other firm. They promise you a bigger salary, all these benefits and let's say two years later you get laid off. You wouldn't want to settle for a relatively small amount based on your service there.
"A lawyer may say, 'What the company offered you is quite fair,' but there are situations where you might be able to ask for a fairly substantial higher amount of money."
To move forward, it's vital to have a firm grasp of the law, which varies greatly across the country. Most provinces have their own pension legislation, while some fall under federal legislation, as do Crown corporations and the military.
"Federal legislation also applies to provinces that don't have provincial legislation, like PEI, and the Territories," says Jeff McLellan, president of Pension Experts. (He is Logan McLellan's father.)
"People need to really understand the legislation because it's not always straightforward. An example would be a Prince Edward Island worker who is terminated from a New Brunswick-owned company. This person needs to take the proper steps to ensure they get federal-coded to ensure they have all the available options."
Things get more complicated because of tax implications. Funds from a severance package would be considered taxable income, though some of the money could be sheltered in an RRSP, provided there's contribution room. To lessen the hit, there are cases where companies can pay out a lump sum over two tax years.
"Some pension plans contain excess money that cannot be moved into a locked-in vehicle," says Jeff McLellan, referring to what's commonly called CRA excess. "It must be taken in cash and can cause quite a tax hit. The person can defer the tax by rolling the CRA excess into their RRSP provided they have room. Many don't have the room and must take the tax hit."
A lump-sum severance could also affect employment insurance payments, either in the form of a delay in or a reduction of payments.
Protecting a spouse or partner is another consideration. Most pensions can be taken as either a single life or a joint-life-last-to-die arrangement. Jeff McLellan says that the joint life pension appears to be the best option for people who need to provide financial security.
"A joint life pension payment is lower but will provide a reduced payment of about 60 per cent, to the survivor," he says. "This can be very expensive, but a single life pension can be all that's needed if the person has enough permanent life insurance."
People often find themselves stymied by a pension's statement of options, which is presented when a pension is not vested. With vested pensions, you get a set date and an age when you can start taking money. That's the easy one.
Pensions that are not vested, by contrast, come with options to select a locked-in retirement account (LIRA), or a life income fund (LIF), or annuity. The latter provides a fixed income, while the locked-in vehicle can provide more income security when pension legislation is applied.
"An example would be a person who needs additional income due to a medical emergency," says Jeff McLellan. "Most legislation includes a clause for medical costs. This must be applied for and approved by either the province or the financial institution holding the account."
Keep in mind, too, that a pension may not be the full picture. A company may also have programs like group RRSPs, deferred profit sharing plan, or a shared ownership plan, that people will need to address. Benefits plans are another consideration.
"Our finding is with pension plans is that clients have, at best, a basic knowledge of how the plan operates," says Mr. Ablett. "Relatively few individuals fully understand the benefit coverage they have with their company; all they really understand is how much comes off each paycheque each month. Everyone's busy. They get their annual statement and shove it in a drawer somewhere. But they need to get the most up-to-date information they can."
Given the murky waters of severance packages and pension plans, Logan McLellan emphasizes the need to seek help.
"If you get a severance package, before you make any decision on that get a lawyer or financial adviser to look over that and make sure the severance you're getting is what you originally negotiated when you started working," he says. "Make sure you get a second opinion and get the best advice."
Other tips for when you're forced out of work:
– Contact Service Canada. The agency can help determine how a lump-sum payout will affect your EI benefits. "You don't want to be surprised," says Logan McLellan.
– Seek help finding work if that's what you want or need. "Sometimes you can get the company to pay for advice about getting another job," says Mr. Ablett, pointing to outplacement services. "A lot of people might have worked for a certain company for a long time and don't even know how to do a résumé anymore or what the procedures would be for looking for new work. That would be something worth asking for."
– Inquire about benefits. Investigate whether you can stay on your company's extended benefits plan or whether you'll have to cover those expenses yourself.