January 28th, 2022

What you need to know about your pension before you quit

Employers are seeing a trend of their employees quitting their jobs. The Covid-19 pandemic has caused many to re-evaluate how they are spending their lives. Employees are valuing their time more than ever and are looking for opportunities where work / life balance is a top priority. One worry that employees may have as they embark on their next stage of life: What happens to my pension?

The three most common workplace retirement savings plans are, Defined Contribution Pension Plans, Defined Benefit Pension Plans and Group Registered Retirement Savings Plans. Regardless of which type of plan you are enrolled in, all is not lost once you leave your job. Each type of plan has special rules and provisions for what you can do with the money when you leave your employer.

Defined Contribution Pension Plan (DCPP)

Defined Contribution plans are typically made up of a combination of employer and employee contributions. The retirement benefit is dependent on how much the fund is worth when you retire.

When you leave your job, you can transfer your pension into either a LIRA, LIF, or RRIF, depending on your province of residence. A LIRA is a locked-in retirement account holding the pension money until it comes time to take an income from it, when it will be converted to a LIF. It is also possible to transfer pensions directly to a LIF, if age requirements are met.

Provincial authorities are responsible for regulating pension money and most pension money is “locked-in”, which means there are age restrictions on when you can withdraw the money and limits on how much you can take. Rules differ from province to province.

Defined Benefit Pension Plan (DBPP)

Defined Benefit Pension Plans guarantee an income to employees in their retirement. Defined Benefit plans may be made up of both employer and employee contributions, or just employer contributions.

When you leave your employer and have a Defined Benefit plan, you will have two options:

  • Leave the money in the plan and take an income based on contributions up until the point you leave.
  • Take the commuted value of the plan and transfer it to a LIRA. The LIRA will be subject to the same locking provisions as mentioned above.

Whether or not to take the commuted value of a Defined Benefit plan is a financial planning issue that should be worked through with your advisor. They will help you determine whether the income or lump sum would be more beneficial to your retirement plan.

Group Registered Retirement Savings Plans (Group RRSP)

Group RRSPs are the most flexible pension option. When you leave your employer, you will be able to transfer your Group RRSP directly into your individual RRSP. Technically, you could also withdraw the account in cash, but this is usually not optimal as the full amount will be taxable.

If you are considering leaving your employer and you are a member of a pension plan, your Cumberland Portfolio Manager can help you understand the rules in your province, your investment options, and discuss the best course of action within the context of your overall financial plan.

Source: ARG Research