Defined Contribution Pension Options at retirement
Written by Jim Yih
Last week, I look at pension options when you retire with a Defined Benefit Pension Plan. When you retire from a Defined Contribution Pension Plan, your retirement options are very different than the options from a Defined Benefit Pension Plan. The pension options you have will depend on a few different things but the biggest issues are the amount of money you have in the pension and your age.
Related article: Pension Plans are the foundation of retirement planning
Depends on your age
When you retire, quit or terminate, your employer will notify the pension plan and let them know you are no longer employed. At that point, the pension plan will send you an options package outlining your options. In most provinces and jurisdictions the earliest pension age is age 55.
If you terminate before the age of 55, you will have the option to transfer funds to a LIRA but you may not have option to create retirement income. (Note: In some provinces, the age requirements are different. For example, the minimum age for retirement is age 50 in Alberta). Because of pension legislation, you will have to move your Defined Contribution Pension to a Locked in Retirement Account commonly known as a LIRA.
Related article: Differences between LIRAs and RRSPs
If you terminate after age 55, you will have a different set of options because you will have income options including the LIF or Life annuity
Depends on how much money you have
The other key determinate of your pension options is the amount of money you have in your pension plan. If you have less that 20% of the YMPE, you will have the option to cash out the pension in full or transfer the balance to a RRSP.
Related article: Online guide to RRSPs
In 2014, the YMPE is $52,500. If you have more than $10,500 (20% of $52,500) in your pension at retirement, then you won’t have the option to cash out funds or transfer to a RRSP. If your pension is more than the 20% of YMPE, the primary issue affecting your pension options will be your age (as discussed earlier). For example, if you have not reached the minimum pension age (55 in most provinces and territories), then you will have the option to transfer to the Pension to a LIRA. If you are over 55, you will have more options. You can choose to transfer the pension funds to a LIRA, LIF (Life Income Fund) or Life Annuity.
Remember, pension legislation varies from province to province.
Unlocking Pension Money
When you move money from a pension to a LIRA, there is no unlocking privileges except for hardship issues or small balances.
The minute you want income from your defined contribution pension, you will need to utilize a LIF or Life annuity. When this happens, you have a one time opportunity to ‘unlock’ 50% of your pension assets and move them to a RRSP.
Related article: Unlocking pension Money
Here’s a few simple examples:
· Jacques is 52 working and living in Ontario and has $288,000 in his DC pension. If we were to retire, he has to move the $288,000 into a LIRA at any financial institution or purchase a Deferred Annuity. He does not have the option to move the money to a Life Income Fund or an immediate Life Annuity because he has not reached the age of 55
· Suzanne is 42 and has $10,000 in her DC pension. If she leaves her employer, she has the option to move the $10,000 into an RRSP of her choice to she can take the amount in cash but it will be taxable.
· Thomas works in Alberta. He is 62 and retiring. He has $316,000 in his DC pension. Thomas can move the pension into a LIRA of his choice and opt not to take income. If he wants income, he would move $158,000 (50% of the $316,000) into a LIF or a Life Annuity. The other 50% would go into a RRSP, RRIF or Life Annuity.