3 More Costly Pension Mistakes and How to Avoid Them

Last month we looked at three costly pension mistakes to avoid. Common pension mistakes include not returning your paperwork on time and quitting before you’re vested. This month we look at three more pension mistakes that can cost you dearly. Although it may not seem like a big deal, simple things like not updating your spouse and beneficiary and not joining your pension plan right away can come back to haunt you. Here are three more costly pension mistakes and how to avoid them.

Mistake #4: Not Updating Your Spouse and Beneficiary

It’s important to keep your spouse and beneficiary on file up to date. If you pass away in retirement and elected a pension with a guarantee period (i.e. 5, 10 or 15 year guarantee), you’ll want to make sure the remainder of the guarantee payments goes to the person you want. Just because you chose your daughter to be your beneficiary when you retired, doesn’t you won’t want to change it. What if you get remarried and decide to make your new spouse your beneficiary? Unless you complete a new beneficiary form, your beneficiary will stay the same. That means your daughter will still be entitled to your pension death benefit when you pass away, leaving your new spouse with nothing.

Related article:  Understanding beneficiary designations

Things get even more complicated if you pass away before retirement. The pension death benefits for a pre-retirement death (or active death) depend on your pension plan and province of employment. Your spouse is usually entitled to the death benefit even if you beneficiaries on file. Even if you have a spouse, it’s still a good idea to name beneficiaries; if your spouse and you were to pass away at the same time (for example in a car crash), your beneficiaries would receive the death benefit instead of your estate. Again, it’s a good idea to complete a new beneficiary form.

Mistake #5: Not Joining Your Company’s Pension Plan Right Away

While a lot of employers enroll their employees in the pension plan right away, some employers leave it up to their employees to enroll. If you have a defined contribution plan, sometimes your employer will only deduct the minimum contributions off your paycheque (for example, 2 per cent instead of the maximum 5 percent of your earnings).

Related article:  Are you missing out on ‘free' money?

As soon as you’re eligible to join your company’s pension plan, you should walk, no run, to your company’s human resources department to sign up. By not joining right away, you’re leaving free money on the table. You may prefer to invest your own money in your RRSP, but if you’re one of the lucky few with a non-contributory gold-plated defined benefit pension plan, there’s no good reason not to join.

Mistake #6: Not Starting Your Pension When You’re Entitled to An Unreduced Pension

If you choose to defer your pension (leave it in the pension plan) instead of transferring it to your RRSP, it’s important to make sure you keep your address up to date with your former employer. When you’re approaching your normal retirement date, your former employer will usually try to contact you, but only if they have your most recent address on file.

Related article:  What are your defined contribution pension options at retirement?

If you’re approaching age 65, it doesn’t hurt to take the initiative and contact your former employer about starting your pension. You’ll want to make sure you start your pension on time; although you may still be able to collect your pension retroactively to age 65 if you commence it later on, in most cases you won’t receive interest.

Written by Sean Cooper

Sean Cooper is a Pension Analyst with a global pension and benefits consulting firm. He is a financial journalist with articles featured in major publications, including the Toronto Star, the Globe and Mail and MoneySense. His areas of expertise include pensions, retirement and health benefits. He has made several media appearances, including Bell Media, Newstalk 1010 and CTV. Follow Sean on Twitter @SeanCooperWrite and check out his personal finance blog at www.seancooperwriter.com.

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