Defined contribution pension options at retirement
Last week, I look at pension options when you retire with a Defined Benefit Pension Plan. When you retire from a Defined Contribution Pension Plan, your retirement options are very different than the options from a Defined Benefit Pension Plan. The pension options you have will depend on a few different things but the biggest issues are the amount of money you have in the pension and your age.
Related article: Pension Plans are the foundation of retirement planning
Depends on your age
When you retire, quit or terminate, your employer will notify the pension plan and let them know you are no longer employed. At that point, the pension plan will send you an options package outlining your options. In most provinces and jurisdictions the earliest pension age is age 55.
If you terminate before the age of 55, you will have the option to transfer funds to a LIRA but you may not have option to create retirement income. (Note: In some provinces, the age requirements are different. For example, the minimum age for retirement is age 50 in Alberta).Because of pension legislation, you will have to move your Defined Contribution Pension to a Locked in Retirement Account commonly known as a LIRA.
Related article: Differences between LIRAs and RRSPs
If you terminate after age 55, you will have a different set of options because you will have income options including the LIF or Life annuity
Depends on how much money you have
The other key determinate of your pension options is the amount of money you have in your pension plan. If you have less that 20% of the YMPE, you will have the option to cash out the pension in full or transfer the balance to a RRSP.
Related article: Online guide to RRSPs
In 2014, the YMPE is $52,500. If you have more than $10,500(20% of $52,500)in your pension at retirement, then you won’t have the option to cash out funds or transfer to a RRSP. If your pension is more than the 20% of YMPE, the primary issue affecting your pension options will be your age (as discussed earlier).For example, if you have not reached the minimum pension age (55 in most provinces and territories), then you will have the option to transfer to the Pension to a LIRA. If you are over 55, you will have more options. You can choose to transfer the pension funds to a LIRA, LIF (Life Income Fund) or Life Annuity.
Remember, pension legislation varies from province to province.
Unlocking pension money
When you move money from a pension to a LIRA, there is no unlocking privileges except for hardship issues or small balances.
The minute you want income from your defined contribution pension, you will need to utilize a LIF or Life annuity. When this happens, you have a one time opportunity to ‘unlock’ 50% of your pension assets and move them to a RRSP.
Related article: Unlocking pension Money
Here’s a few simple examples:
- Jacques is 52 working and living in Ontario and has $288,000 in his DC pension. If we were to retire, he has to move the $288,000 into a LIRA at any financial institution or purchase a Deferred Annuity. He does not have the option to move the money to a Life Income Fund or an immediate Life Annuity because he has not reached the age of 55
- Suzanne is 42 and has $10,000 in her DC pension. If she leaves her employer, she has the option to move the $10,000 into an RRSP of her choice to she can take the amount in cash but it will be taxable.
- Thomas works in Alberta. He is 62 and retiring. He has $316,000 in his DC pension. Thomas can move the pension into a LIRA of his choice and opt not to take income. If he wants income, he would move $158,000 (50% of the $316,000) into a LIF or a Life Annuity. The other 50% would go into a RRSP, RRIF or Life Annuity.
Next week, we will look at a case study and show you the actual numbers for someone retiring from a DC Pension plan and the kind of income they could get from their pension plan.
Jim, it is difficult to find anyone who can clarify what contributions qualifies as having to be “locked in”. My research tells me it is only what you contributed that was matched by the company (and the matched portion as well of course). That being the case, if you make voluntary contributions above the match, how do you assure they do not get locked in?
For example, if the company match is 4% but you actually contribute an additional 6%, that additional 6% should not get locked in, correct?
Jim my wife had the privilege of sitting in on one of your lectures and really enjoyed it and actually got a little something out of it. Since then she has passed on a number of articles you have written to me which i have also enjoyed.
Here’s the bottom line I’m 59, my wife is employed and 54 yrs. we would like to retire in the next one or two years. Are you simply an advisor or do you also do financial planning and management for a fee. My problem is that there are a lot of planners and advisors but i truly do not know who to trust. This is my life time savings.
Two years ago i put all my RRSP and pension portfolio into GICs at 2.6% because no one seemed to know where the markets were going, there was talk of the fiscal cliff in the USA and i had just got back to normal from 2008 downturn. Looking back what a mistake most of the people around me at work were getting returns of 15%plus while i am stuck at 2.6% for another 18 months which frankly doesn’t make me look to smart not to mention the loss.
I need someone to handle my financial affairs going forward are you able to steer me in the right direction. I can come into the city or where ever you are at with minimal notice.
Thank you for your time and consideration in this matter.
We are both 60 years old and we have been retired for two years. We have no debt and have put money in a RRSP. We both have CPP and only one of us has a company pension. We were told by an accountant that we should start taking out our RRSP before we turn 65 so to have more control of our money and the taxes would not be as much now then when the RRSP is changed to a RIFF. What is your opinion on this advise.
regarding the Defined Contribution Pension options, the last example, Can Thomas do a partial transfer.
For example move $100,000 from LIRA ( $50,000 to LIF & $50,000 to RRSP) at age 63, Next year, age 64, do the same thing, move $100,000 from LIRA. the rest ($116,000) in the future years.
I see a few comments but no answers to them. Is this common for this site? I would like to see what Jim’s responses are to them.
Jim – plenty of people asking you questions- why don’t you answer????