Making the Most of Your Pension

We often hear buying a house is the biggest purchase you will make in your lifetime, but it may not be the biggest financial decision you will ever make. If you have worked at the same job for 20-25 years or longer, the value of your pension may be higher than what you paid for your house, especially if you purchased your home 20-25 years ago. What to do with that pension may be the biggest financial decision you make in your life, and is a decision you probably won’t want to make without the help and advice of a professional.

Pension Option Packages

When you retire from a job that has a pension, you will receive a pension option package that lists your choices for how you will receive your pension, and it can range from 2-3 choices to as many as 18-20 possible options. This is where an experienced advisor can help you to understand and make sense of the options and their benefits and disadvantages, and to help you decide which is the best option for you and your circumstances.

The choices will be simpler if you do not have a spouse, but if you do, it will increase the options available, as well requiring taking your spouse’s financial situation into account. If you have a spouse, there will usually be three different options for what your spouse’s survivor benefit would be if you were to pass away, and the higher the percentage you choose for your survivor to receive if you were to pass away, the lower your own monthly pension benefit will be.    

For each of these three different survivor benefit options, each one can have three sub-options depending on how long of a “guarantee period” you want for the payments (usually 5, 10 or 15 years). The guarantee period makes sure you and/or your spouse, or your beneficiary or estate, will still get a certain number of years’ worth of payments out of the pension, even if you and your spouse pass away shortly after starting to receive your pension. Again, the longer of a guarantee period you choose, the lower your actual monthly pension payments will be.

So now you have three pension options that each have three sub-options, which gets you to nine potential options to choose between. But wait, there’s more!    

Integration of Your CPP and OAS Payments

If you are retiring before age 60 or 65, some pensions will give you the option to ‘integrate’ your Canada Pension Plan and/or Old Age Security payments into your monthly pension (also called a Bridge Benefit). This gives you a higher payment from when you retire until you turn 60 or 65, then lower payments after that. So, for the main 3 to 9 options you might have, that can double to 6 to 18 options for monthly pension payments to choose between if you retire early and have a set of ‘integrated’ options. That is if you want to simply collect a monthly amount for the rest of your (and/or your spouse’s) life.

Commute or Transfer to a Locked-In Retirement Account

Many pensions will also give you an option to ‘commute’ or transfer a lump sum from the pension to a locked-in retirement account (also known as a LIRA or LIF in Manitoba). With that amount, you can determine how you want to invest the money, and you can also choose when you want to start withdrawing money, as well as how much you want to withdraw. The amount you can take out each year will be subject to both an annual minimum, and more importantly, an annual maximum, depending on your age and the provincial (or Federal) legislation of the pension.

So, with both the possible monthly pension options, and the option to commute the lump-sum value of the pension, you can easily have more than 10, to up to 20 choices for what to do with your pension. It’s easy to feel overwhelmed with understanding them and trying to figure out what makes the most sense, and some people might even think it’s probably easier to just keep working than to retire and decide what to do with their pension.

Getting Down to a Manageable Number of Options

This is exactly where an experienced advisor or planner can help you understand these options, look at the pros and cons of each, and help you decide what makes the most sense for your situation. I’ve helped many people with their pension options package, and it usually involves the same steps to get down to a manageable number of options, and to get them to a point where you can make an ‘apples to apples’ comparison of each.

Risk Tolerance

After comparing the different survivor benefit options and guarantee periods (and CPP/OAS integration options if applicable), we can usually narrow the monthly pension options to the one that makes the most sense for your situation. From there, I usually run some projections to show how long you might be able to receive that same monthly pension payment if you had taken the commuted value transfer and invested it. Risk tolerance certainly impacts these calculations, as those payments won’t last nearly as long for someone only comfortable investing in guaranteed investments like GICs or Term Deposits, since those are currently earning less than 2% return. For someone comfortable in a Conservative or Balanced portfolio, which have been able to give average returns closer to 4-5%, those payments can last much longer, and can even be projected to last beyond age 90.

Estate or Beneficiaries

One other very important detail this projection and comparison often highlights is how much money you might leave for your estate or beneficiaries depending on the option you choose and how long you (and/or your spouse) might live. Many people are surprised to see how much of their original pension is left after 20 or even 25 years of drawing an income from it, as long as they have been able to average a 4-5% return. Depending on the value of the pension to begin with, there can still be a six-figure amount left after 20 years of drawing from it, which can be left to your estate or beneficiaries. On the other hand, if both you and your spouse have passed away after the end of the pension guarantee period, the pension likely won’t be obligated to pay anything else out, which could mean possibly leaving thousands or hundreds of thousands of dollars ‘on the table’ in that scenario. This is often one of the biggest factors that leads people to transfer their pension instead of taking a monthly pension option.

Flexibility to Take Bigger Amounts Out

Another big benefit of transferring the pension to a LIRA or LIF is having more flexibility to take out bigger amounts than you would be able to receive if you took the monthly pension option, particularly by taking advantage of pension unlocking provisions. The risk of doing this is that it can shorten the lifespan of the pension, but it can be a great option if people don’t expect to live into their 90’s, and/or if they want to have a higher income earlier in their retirement when they are healthier and physically able to do more. This again is where it is important and beneficial to work with an advisor or planner as they can look not just at your pension, but also at your retirement savings and CPP and OAS payments to come up with a plan for how much money you can live on per month, and whether that money will come from your pension, retirement savings, or CPP and OAS. I use the analogy of retirement income as being a puzzle, and it really is, as you have these different pieces of income that come together in retirement, and you need to figure out when and how much to be taking from each source at different stages of retirement. It’s hard to come up with a ‘rule of thumb’ that applies to everyone, as everyone’s income sources and income needs can vary so much, so that’s why I encourage people to work with advisor to help put this puzzle together before they retire and start making big decisions.

Pensions Benefit Act

The Manitoba government recently amended the Pension Benefits Act to give more flexibility and access to funds that have been transferred from pensions that are under Manitoba pension legislation. Some of these changes are targeted at people experiencing various financial hardships, but there is one major change that is based entirely on age and applies regardless of financial situation. Not all of these changes will benefit everyone that has transferred their pension out of their pension plan.  But some of the changes can certainly benefit people needing more money now, and who otherwise would only be able to take out a small amount of their pension, which may not be enough to help them out in a time of need. The changes also give advisors and planners more flexibility in developing a retirement income plan for clients, or solving a short-term income need.

Before the changes, one of the main unlocking provisions for Manitoba-legislated pensions was that once you are 55, you are able to unlock 50% of a LIF and transfer it to an account called a PRIF. This gives you more flexibility and control over how much you are withdrawing, and can better match your income to your potential needs. The biggest new change is that effective October 1 (2021), Manitobans aged 65 and older will be able to fully unlock LIRA or LIF accounts that are under MB pension legislation. This will give further flexibility to Manitobans to access more of their previously locked-in pension funds, and will help Manitobans who have more of a need for money now than they may have in the future.

Aside from the option to fully unlock Manitoba-based LIRAs and LIFs at age 65, the amendments will also allow Manitobans to unlock funds under certain financial hardships like low expected income, eviction for rental arrears, mortgage foreclosure, and medical/dental expenses that aren’t covered under other insurance or benefit programs. There is also a change to allow more flexibility in splitting Manitoban-based pension assets in the event of marital breakdown, as they will no longer need to be divided either 50/50, or not divided at all.

Overall, these changes are great news for people with pension money under Manitoba jurisdiction, as well as for advisors and planners helping clients with Manitoba-legislation pension money to plan for income in retirement. It’s also another factor to consider when deciding whether to take a set monthly amount from your pension, or to transfer the commuted value of the pension to a LIF or LIRA, as it gives further flexibility if you choose the commuted value transfer option.

Unlocking Options and Knowing How to Properly Apply

As you can see, there is a lot to consider when deciding what to do with a pension when you retire. The number of monthly pension options to start with can be confusing and overwhelming, and you need specific software to be able to calculate how much income you might have and how long the pension might last if you transfer the commuted value out. While people may be aware of the unlocking options, knowing how to apply to unlock the 50% and properly complete the paperwork is another story. This again is where a good advisor can really help with understanding the different options, figuring out what makes the most sense for you, and helping with all the paperwork to turn that pension option package into actual money coming into your account for you to live on in retirement.

- Dennis Rubeniuk, Investment Advisor, Mutual Funds

Dennis Rubeniuk is an Investment Advisor (Mutual Funds) at Endeavour Wealth Management with iA Private Wealth Inc, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.

This information has been prepared by Dennis Rubeniuk who is an Investment Advisor (Mutual Funds) for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.