When a member of a pension plan terminates employment, is at least ten years away from their normal retirement date and is entitled to a fully vested ( locked in) benefit, there are normally three options to choose from:
- A deferred Pension, which is a lifetime benefit paid in equal installments starting at a fixed date in the future (usually between age 55 and 65). The pension plan guarantees the annual lifetime payments. At Death, payments continue to the surviving spouse, generally in a reduced amount.
- The commuted value transfer of the pension to a personal retirement plan on a tax sheltered basis. The commuted value of a defined benefit pension, as calculated by the plan’s actuary, is a single sum that represents the present value of the lifetime pension payments as calculated under the plan’s benefit formula.
This benefit is normally locked-in under provincial or federal pension legislation to ensure the transferred amounts must be used to provide lifetime benefits. The commuted value may have an excess amount that is subject to immediate taxation. Transfer of locked-in benefits are made to locked-in retirement accounts( LIRAs), to Life income funds (LIFs), or to other forms of registered plans.
- Transfer the commuted value of the benefit to another registered pension plan. This is viable if the individual has become a member of a new plan which permits a transfer. This allows the years of pensionable years of service under the current plan to be credited under the new plan. The amounts transferred are not subject to the maximum transfer rules.
Factors to consider
- Is there a reduction of the pension benefits if the payments start prior to the normal retirement date?
- Is the pension indexed to inflation before and after retirement?
- What is the amount of pension benefit that will be paid to the surviving spouse, on both a pre- retirement and post retirement basis?
- How long is the guaranteed period?
- Does the plan provide for a bridging period?
- Is the pension in a significant deficit position that could create significant risk to the client if the sponsor become bankrupt
As a Financial Advisor for the past 25 years I can help determine which option is right for you and your family.