When you leave an employer who a pension plan in place, there is usually an option to transfer that pension plan into a personal retirement account. Essentially, what you're doing is leaving the pension plan in exchange for a lump sum of cash that is determined to be an equal benefit when compared to the pension you would've received.
There are many pros and cons for transferring your pension to a personal retirement account, and the situation is very different with each individual case..
Considerations when Transferring
Flexibility - More options in how the money is invested and withdrawn. You and your financial planner can discuss risk tolerance and how to use that money to provide long-term income in your retirement.
Inheritance - Instead of the money you contributed to the pension your working life being consumed by the pension company to continue providing benefits to other pensioners, you will have the money in your pocket allowing you to pass it along to future generations.
Health - If you suffer from poor health, there will be access to more money while you're still alive, and/or you will be able to leave a larger inheritance for your family.
Concerns about the Employers Future - If you're unsure that your former employer will be able to financially meet the pension promise over the long term, it may be beneficial to take a lump sum to avoid the uncertainty. Ontario is the only province with pension laws protecting you in this situation, and it's capped at $1,000/month.
Certainty - A pension plan monthly payment should never decrease, even in a stock market correction. When planned for correctly, a personal retirement account can have the same reliability.
Inflation - Some pension plans come with a provision that your pension payments will increase with inflation. If your pension has that provision, it becomes more valuable. In a personal retirement account, inflation has to be made up through quality investing.
Provisions for Survivors - Most pension plans will continue payment to your spouse or common-law partner after death - it's built into the plan. In the personal retirement account, this is done through the inheritance.
Taxation - Depending on the size of the pension payout and other factors around your personal financial situation, there may be taxes due when transferring a pension. Many times the taxes due can be eliminated or minimized with different strategies.
There is a different answer for everyone and it depends on your individual situation. If you're not solely depending on pension income or an extremely low risk investor, there is usually a very strong argument to transfer your pension. I invite you to set up a meeting to discuss your personal scenario.
I say 'personal retirement accounts' because it's an easier term to understand and follow than if I used each account name. When you actually transfer a pension, the main accounts being used are:
A TFSA (Tax-Free Savings Account), and Non-Registered Account are often used as part of the financial plan that accompanies a pension transfer as well. In most cases you usually only use 3-4 of the account types, but all of them have a certain place depending on the rules of the pension being transferred.
You usually need to get paperwork from the pension company on your pension transfer options. In most cases this can be done through the Human Resource Department from your employer. Depending on the employer, there might be an online portal where you can access this information too.
The most important information includes:
In most cases, your employer or pension company will hand you a stack of documents. You can just hand those over to your financial planner and they will know what to look for and how to get the needed information from them.