Pension plans provide safe, guaranteed income in retirement
Samantha and Jack just met with a financial advisor recommending they pull their money out of Jack’s defined benefit pension plan with the government and move it into a Locked-in Retirement Account (LIRA). The advisor suggested that he could earn better returns than the pension and that the LIRA would provide an estate for their kids. Moving the money into a LIRA would also give them the opportunity to unlock 50% of the LIRA into an RRSP where they could use the money for whatever they wanted.
Related article: Unlocking LIRA money
Before anyone considers moving money out of a pension plan, there are many issues to consider:
1. You have to quit to pull the money out.
In Jack’s case, he works for the Alberta Government. His advisor told him he could move money out of his pension before the age of 55, which is correct but he was not aware that he had to quit to move the money out. In most cases, especially for defined benefit pension plans, the only way you can move pension money out of the pension is to sever ties with the employer. Make sure your financial advisor is knowledgeable and qualified to advise on pensions.
2. Pension decisions are irreversible.
Any pension decision should be made with care especially the decision to move money to a LIRA. Essentially, you have only one chance to make the right decision. All pension decisions are irreversible and irrevocable. Once you make a decision, you can’t go back and reverse the decision. Make sure you take your time and be very, very careful before you react too quickly.
3. Pension decisions are personal.
When it comes to pensions, every situation is unique. Jack knew other people who moved their pensions out to a LIRA so he thought he should consider it too. The only way you can make the right decision about pensions is to crunch your own numbers. Many people have a tendency to look at other people and drawing comparison but this is foolish analysis. Jack’s pension is based on his age, his spouse’s age, his years of service, his salary information, etc. Just because it made sense for someone else, it does not mean Jack should too. Be careful about using rules of thumb and oversimplified analysis.
4. Pensions provide a safe guaranteed income.
The whole point of pension plans is to provide lifetime guaranteed income. Although there can be some valid arguments to move pension money into a LIRA, never downplay the importance of lifetime guaranteed income. The minute you move money out to a LIRA, you have no guarantees. Just ask Jack’s friend Eldon about his decision to pull his pension money out 3 years ago to invest in a portfolio targeting 9% returns. Now, not only has not made 9% but also he has lost about 25% of his pension money to these crazy markets.
5. Watch out for biased advice.
Getting unbiased help with pension advice is not easy. Most pension representatives are not allowed to provide advice as to whether you should or should not take your pension. On the other hand, going to a financial advisor can have some flaws too because most financial advisors make money only if they get the asset to manage. Thus it is much better to pay someone a fee to do the analysis. Wherever you seek help in making this very important process, make sure the analysis is balanced. There are pros and cons to every decision. You need to be aware of both before you can make the right decision.
There are many more issues and considerations if you are contemplating moving pension money out to a LIRA. Just be careful, complete and patient. Do what’s right for you!
>>>>Thus it is much better to pay someone a fee to do the analysis.
Jim, can we get a list of links to people that do this type of analysis?
good post, I am actually thinking that I might do a post on what math people need to do when they are presented this option! more than anything, people and financial planners typically do not build in enough margins of error when comparing the options
Having done this sort of analysis a number of times, there’s a couple of things that people will want to take into consideration:
* the continued viability of the pension plan (ie, Nortel, Detroit, etc)
* whether or not the pension plan offers indexing of benefits (this can have a HUGE impact on the analysis, and is often overlooked)
* what other benefits come with the pension plan (health care? medications? check into it)
* how much the advisor would get paid to move into a LIRA – if you’re moving, say, $100,000 into a locked in RRSP, and the advisor puts it into DSC mutual funds, the advisor would end up with about $4,000.
There are many more factors – such as age of spouse, requirement or desire to leave an estate, control of funds – but those are some that sometimes get overlooked.
Sarah you are right about the indexing, people ignore it way too much.
For clarification, could you explain the how much the advisor gets paid point? (assuming that the mutual fund is the best solution for the client) I understand the idea of discovering if there is a conflict of interest, but a DSC & ISC unit is still a class A unit. Therefore the RoR will be the same for each.
choosing to pull your DB plan should be based on tax, income type, liquidity, comfort with volatility, etc.
Trying to decide if you “advisor” has your best interests at heart is a separate issue that should be resolved before you even bring this scenario to them
Fiscally fit, the reason I bring up the advisor commission is that I believe it should be disclosed. I’ve seen too many people who have absolutely no idea what pension options to choose, who ask their advisor for advice – and then they don’t realize that with one recommendation, the advisor gets paid (a fair bit of $), and with the other option, the advisor gets paid nothing.
So yes, getting separate advice for which you pay a fee is best, but if you don’t do that (because “of course, my advisor has my best interests at heart, he told me so!”), at least get the commission disclosed.
I agree. I believe not enough info is disclosed. At least they are moving in the right direction with National Instrument 31-103.
I do disagree that fee for service is best though. But I also do not believe that embedded fee is the best either. I believe that they are both simply tools that people have at their disposal. I agree in full disclosure and transparency, but I don’t believe one compensation structure is “better” than another.
good discussion Sarah!
The one sure thing is that if the money stays in the plan, the adviser earns nothing. The other thing that is almost for sure is that being an Alberta government pension you do not have to worry about not getting paid and I suspect that it may have some inflation indexing. Sounds to me like the adviser has interests other than the clients best interest in mind. JMO