When your job ends, the pension choices begin

The pros and cons of staying, switching or cashing in

Deanne Gage 27 December, 2012 | 7:00PM

When you've been downsized from your job or are just changing employers, many decisions abound. If you participated in your company's pension plan, for example, you'll be given an array of choices. Should you keep the pension with your company, move it to your new employer or collapse it and create your own locked-in account? Here's a summary of the pros and cons of each option.

Remain in the company pension

How it works: The amount you and your employer have contributed to the pension stays in the existing pension plan. The pension continues to grow in value. When you turn 65 (or whatever age your employer specifies), you will receive a specific amount of money each month until you die. The amount, calculated by actuaries, is usually spelled out to you in a letter from the company's pension administrators.

Pros: You know what you're getting. If you've participated in the pension plan, you can count on receiving a specific amount of monthly income in retirement, explains Frank DiPietro, director of tax and estate planning for Mackenzie Investments. That's extremely valuable, especially if the pension in question is a public-sector defined-benefit plan, which unlike most private-sector plans is fully indexed to inflation. "Maximizing the cash flow you receive in retirement can be a more attractive option," he says. At a time when more of us are living longer, receiving a guaranteed amount of monthly income for your and your spouse's life may alleviate fears of outliving your money.

Cons: If you participated in the pension only for a few years, the monthly amounts would be minimal at best. Another thing to consider is the viability of the company. Twenty years ago, few people predicted that companies with the stature of General Motors or Nortel Networks would have difficulty honouring their pension obligations, notes DiPietro. "More and more pension plans these days are underfunded and benefits are being slashed to pensioners," he says. "We've seen a lot of pensioners getting less than they expected so you want to be comfortable knowing that if you decide to stay in the pension plan, the company sponsoring the plan is committed to it and doesn't foresee making any changes."

Take the commuted value of the pension

How it works: You take the money out of the pension and transfer it to your own special locked-in retirement account or deferred life annuity. Your financial institution needs to complete and sign forms of intention from Canada Revenue Agency. Once you commute the pension, you can't change your decision. You can start to draw on money at age 55 for early retirement or 65 for regular retirement.

Pros: You'll have more control over the money and any investment decisions. A savvy investor or one who has the right advisor has the potential to earn higher returns than one who stayed with the pension. If you don't deplete the funds in this locked-in account during retirement, you'll have some money to leave to children or other heirs. Compare that to a standard pension, where once you and your spouse die, the pension stops.

Cons: This is an unattractive option if you know little about investing and aren't sure if your advisor can meet or exceed the returns that the pension fund's managers will earn. The risk is that you could outlive your asset. Also, pension legislation dictates the maximum amount an individual can receive from their locked-in retirement accounts. In many cases, the maximum amount of income that you may receive from a locked-in account in retirement on a monthly basis may be less than what you might have received from the pension plan, says DiPietro. If maximizing cash flow is your key objective, commuting the pension may not be the best choice," he adds.

Transfer pension to new employer

How it works: When you start the new position, simply fill out paperwork to transfer money from Pension A to Pension B. You'll also need written confirmation from the new employer that the transfer will in fact be accepted.

Pros: You'll get a continuation of a pension, albeit at a new company.

Cons: Again, you'll need to consider the future of the company -- and therefore its pension. Are you moving to a start-up or an established venture?

Every employee situation is different so before making this decision, DiPietro recommends consulting a professional advisor or pension expert for advice.

About Author

Deanne Gage

Deanne Gage  Deanne Gage is a Toronto-based writer who has specialized in personal-finance issues since 1999. A recipient of several journalism awards, including one from the Investment Funds Institute of Canada, she is also a former editor of Advisor's Edge and Advisor.ca. She can be reached at deannegage@gmail.com.