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 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 you 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 over simplified analysis.
4. Pensions provide 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 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 ne 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 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!