Pension plans are the cornerstone of retirement income planning. Just ask anyone who is getting a pension if they like the consistent, stable, guaranteed cash flow.
When it comes to pension plans, the trends in Canada are clear. For starters, there will be fewer people collecting pension income in the future. According to Canada Revenue Agency (CRA), 56% of current seniors receive some type of pension income. Only 40% of the workforce currently belongs to a pension plan.
The reason fewer people belong to pension plans is the trend that employers are moving away from defined contribution pension plans for group RRSP and defined contribution plans, putting more of the management and liability for retirement planning on to the employees. Although there are big advantages to employees for having a defined benefit plan, many employers view them as more costly and cumbersome to manage.
If pensions are so great, why are more and more employees interested in moving money out of their pensions?
Should I stay or should I go?
Recently, a reader, Shirley, asked me if it was a good idea for her to consider moving her money out of her defined benefit pension plan. When I asked her why she thought this would be a good idea, it was because a financial advisor told her about some of the merits of moving money out of her pension.
Over the past few years, I have talked to more and more people who are interested in doing the same. In some cases, this is perpetuated because some provinces like Saskatchewan, Manitoba, and Alberta are making it easier and more flexible to access pension funds once they are transferred to a personal locked-in plan.
Why is Shirley interested in moving the money out?
When posed with this question, Shirley felt that she might be better off having control over the money. Her financial advisor was quick to point out that his portfolio made 14% and grossly outperformed the 7% return the pension made last year.
The financial advisor also conveyed to her that if she moved the money to a personal LIRA, there would be money left over for her children after she and her husband passed away. This was an appealing feature to Shirley. After all who would not want to give money to their kids? With a pension, the income stops when both spouses pass away.
Lastly, her financial advisor advised her of the changes made to LIRA options giving her the ability to unlock 50% of her pension money. She thought this might be an opportunity to use the money to purchase some vacation property.
In addition, sometimes I also hear about people that are just interested in moving their pensions out because of fears that pension assets are being mismanaged and they prefer to have the control themselves.
A time for good analysis
All of these points to move pension money out to a LIRA are valid arguments. However, the decision to move money out should never be made lightly. Before anyone makes any decisions, it is crucial to take the time to do more detailed analysis. The fact is there is only one chance to make the right decision. The decision to move money out of a pension is irrevocable and irreversible.
Proper analysis is challenging and complex but next week, you will see that as we dig a little deeper, there are a lot of considerations before making the decision to pull the pension money out.