When contemplating retirement (or even a career change), members of pension plans have important decisions to make that have long-term financial ramifications.
For this reason it is a good idea to look beyond plan administrators for advice when making these decisions.
For example, if you leave your employer before normal retirement age, you may be given two options: to stay with the plan and receive a specified income when you retire; or to transfer a lump-sum “commuted value” to a locked-in RRSP or similar plan.
Which is the better option? Both have benefits and drawbacks.
On one hand, if you live longer than average life expectancy, guaranteed income from a deferred pension may turn out to be a better choice.
On the other hand, if your employer runs into financial trouble, you could be left without a pension. Transferring to a locked-in RRSP will afford you more flexibility when structuring your income flow during retirement, while sticking with the pension plan provides more assurance of what that income will be.
Personally, when asked to provide advice on this decision I refer to financial software that will estimate the difference in dollars between the two, but ultimately your decision will depend on more than what the number crunching tells you.
Another important decision involves the survivor’s benefit.
Most plans will allow you to elect for a lower level of income during retirement in exchange for a promise that your spouse will receive a portion (i.e. 60 per cent) of your pension should you predecease him or her. When faced with the options, many tend to overestimate the cost of a survivor’s benefit, overlooking the fact that the difference between the two options widens over time (in cases where the pension is indexed). The cost of the survivor’s benefit may seem small at first, but over the life of the retiree can be substantial. In addition I have often seen situations where both spouse are members of the same plan, in which case it is a certainty that at least one will never benefit from a survivor’s pension.
It is important to consider the various scenarios, and to try to get a grasp on the true cost of a survivor’s benefit, as there are alternatives. For example: consider foregoing the survivor pension and using the extra income to fund a life insurance policy. In many cases the overall cost will be less, and you are assured that someone (i.e. spouse or children) will receive something in the end.
In this case a spreadsheet can be helpful in assessing the options.
Pension planning is an important component of your long-term financial health. Be sure that you fully understand your options prior to making these important decisions.
Jim Grant, CFP (Certified Financial Planner) is a Financial Advisor with Raymond James Ltd (RJL). This article is for information only. Securities are offered through Raymond James Ltd., member Canadian Investor Protection Fund. Insurance and estate planning offered through Raymond James Financial Planning Ltd., not member Canadian Investor Protection Fund. For more information feel free to call Jim at (250) 594-1100, or email raymondjames.ca” jim.grant@raymondjames.ca. and/or visit www.jimgrant.ca.
