In the fall of 2021, 39-year-old Krista Lehman quit her job as a program assistant at a Vancouver post-secondary institution to take a mental health break and pursue other career options.
When it came to her defined benefit pension plan, her employer鈥檚 human resources department provided her with a package that offered her the choice of taking the commuted value of her pension 鈥� a lump sum based on a calculation of what the future pension is worth now 鈥� or keeping the money in her pension plan until 2047, when she would start receiving monthly payments.
鈥淚 was shocked at how much money I had,鈥� Lehman said. 鈥淚 had never had this amount of money in my bank account before.鈥�
For millennials who haven鈥檛 yet had a chance to invest outside of mandatory employee pension contributions, figuring out what to do with a pension plan after leaving a job can be daunting.
In Lehman鈥檚 case, she felt having autonomy over how to invest her money was more attractive than leaving it with her former employer.
鈥淚 wanted to more of an active participant in my savings and in my retirement planning than I had in the past, so this felt like an opportunity to do that,鈥� she said.
鈥淚 also wanted to make ethical decisions about where my money sits.鈥�
Lehman took the full commuted value, putting nearly 50 per cent in a Locked-In Retirement Account (LIRA), approximately 33 per cent in a Registered Retirement Savings Account, and cashed out the other 17 per cent to handle current expenses, like a new computer.
Each employee will get their own set of choices when they leave a job, and those choices will differ even further depending on whether they have a defined benefit pension plan or a defined contribution plan, said Liz Schieck, certified financial planner at the New School of Finance in Toronto.
Deciding what exactly to do with a pension can be overwhelming, Schieck added, which is why she recommends clients take some time to think it through and seek the advice of an unbiased financial planner if possible.
When it comes to defined benefit pension plans, Schieck sees clients most commonly decide between leaving the pension with their employer, transferring it to their new employer鈥檚 pension plan or taking the pension and investing it elsewhere.
In this situation, it comes down to confidence and comfort levels. 鈥淪ome individuals might feel more averse to investing it in the market themselves, while others might feel less confidence in a pension,鈥� Schieck said
In the latter case, those in their 20s and 30s might not feel confident that a company is going to continue to exist when they retire and throughout that retirement.
For those that decide to take the pension with them, putting that money into a LIRA, and any remaining money into an RRSP if you have available room, means that it won鈥檛 count as taxable income. However, if you don鈥檛 put remaining funds, outside of a LIRA, in an RRSP, you鈥檒l get a check and that money will be taxed, Schieck said.
If someone is weighed down by student debt, that money can make a big difference in helping to pay it off.
But the decision of whether to put it in an RRSP or take the tax hit is not one-size-fits all, Schieck said.
鈥淚t depends on what tax rate you鈥檙e going to pay, what tax bracket you鈥檙e in, what debt you have, what鈥檚 the interest rate on, and what other savings capacity you will have going forward. This is why it鈥檚 great to get advice.鈥�
When it comes to a defined contribution plan, the decision can sometimes be simpler because there are less choices. The defined contribution plan already acts as an investment account, Schieck said. There鈥檚 a set amount of money that you can either keep in the plan or invest in a locked-in account elsewhere. There鈥檚 also an option to buy an annuity, but they鈥檙e a much less popular route.
When quitting a job with a defined contribution plan, the decision about whether to take the pension with you is dependent upon what products you want to invest in and where, Shieck said.
For example, those that take the pension with them might feel more comfortable keeping their investments at their own bank, or want to be more selective about their investments, like Lehman, who wanted to ensure her investments are ethical.
This report by The Canadian Press was first published March 22, 2022.
Leah Golob, The Canadian Press
