So, you’ve been working hard and putting in your time for a number of years with a company that offers you a pension plan. But a new, enticing job offer has fallen onto your lap and you’re ready for a change! Awesome!
As for your pension, rest assured, the money is not lost. Before we get into the different options that are available when you leave a job with a pension, let’s first define a key term in the discussion of this topic: vesting.
In most pension plans both you and your employer contribute to your pension plan. The money that you contribute is yours no matter what – you can never lose this portion. However, vesting refers to when you are entitled to keep the amounts that your employer has contributed to your pension.
For all federally regulated pension plans, you are immediately entitled to all money your employer has contributed to your pension. Some provincially regulated plans have what’s called a “vesting period” of up to a maximum of 2 years, where you may forfeit some or all of the employer’s portion of your pension. For example, if the vesting period is 2 years and you leave your job after 1 year, you would forfeit the employer’s contributions. But if you have been at your job for longer than 2 years, or longer than the vesting period defined by your plan, you will not forfeit any.
Now, what do you DO with the money?
Typically, when you leave a pension plan, you are presented with several options:
1. Reduced pension
You may opt to remain in your current pension plan, although you would not be allowed to make any further contributions. Once you reach the age of eligibility (typically age 55) you can elect to begin receiving your pension. However, the amount you receive would be a reduced pension benefit, due to the fact that had only contributed to the plan for 7 years. If you are leaving a defined benefit (DB) pension plan, you should be notified in advance as to what this amount would be.
2. Pension transfer
You may be able to transfer your plan if your new pension plan allows the transfer. The transfer may not result in the same number of years of service in your current plan. This is because some pension plans are more lucrative than others, and some have different contribution rates than others. Therefore, although you have accumulated 7 years of pensionable service in your current plan, that could translate to fewer (or more) years of service in the new plan.
3. Commuted value
The commuted value is a lump sum amount that your pension is currently worth. By electing this option, you receive a lump sum that must be invested in a special account such as a Locked In Retirement Account (LIRA) or Locked Retirement Savings Plan (LRSP) which are accounts that exist solely for this purpose – to accept transfers from pension plans. Investment options are the same as within an RRSP, however, some of the drawbacks to this approach is that there are specific rules regarding the withdrawal of funds from the account, and that you become responsible for the investment decisions and subsequent performance of the account.
Unfortunately, very few companies offer guidance and advice when leaving their pension plan. They would typically offer administrative advice – providing you with the necessary forms, telling you the date you must complete the forms, where to mail the completed forms, etc. – but no advice as to how to actually make the decision on which option is best for you.
That’s where we come in. This decision should not be taken lightly, as there are many variables to calculate and many factors to consider. If you have any other questions about pensions or retirement planning, just ask your MOOLA Financial Advisor!